Claims trends

Broadly speaking, the majority of claims currently made against directors and officers can be divided into 2 categories:

  1. Compensatory claims (for damages) where the asserted liability is based on allegations of breaches of directors duties (either under the Corporations Act or at common law).
  2. Regulatory claims where liability derives from regulatory investigations or actions (e.g. ASIC, OH&S or environmental protection agencies).

The two categories are not mutually exclusive. For instance an ASIC Notice requiring the examination of a director as part of an investigation can also give rise to a claim on a D&O policy. This will usually involve the advancement of legal fees for the investigation and the investigation may give rise to the institution of criminal or civil penalty proceedings. A director may also be subject to a separate but related claim for damages, for example from a shareholder.

However, in recent times the trend has predominantly been towards D&O claim and circumstance notifications arising out of regulatory activity. This may surprise some people as much of the post GFC focus in the media has been on representative or class actions brought against directors of collapsed companies.

The important point to remember is that compensatory claims can easily 'piggy back' onto regulatory investigations. Due to this possibility, it is critical that your D&O policy provides broad coverage, an appropriate limit of indemnity and a structure designed to preclude the exhaustion of the limit by a regulatory action before the conclusion of the settlement of the compensatory claim.

Recent claims trends also indicate the increased use of 'quasi' official proceedings as a means to advance the prosecution of damages claims against directors. An example of this is where litigation funders underwrite a liquidator’s examination.

Detailed information on claims trends for D&O insurance amongst other forms of insurance is available in AON’s Commercial Insurance Broker 2010 and Quarterly Market Report for SMEs 2010.

Steps to take in the event of a claim

D&O insurance policies provide cover on a 'claims made' basis.

This type of cover obliges the director to disclose to the insurer any facts which may be relevant to a potential claim against the director. This notification must take place during the policy period and as soon as the director becomes aware of any circumstances which may give rise to a claim(s).

It is important to note that in a claim situation, what constitutes awareness of any circumstances that eventually give rise to a claim is based on a 'reasonable director' test. In legal terms, the test is whether or not a reasonable director in your position would have considered the relevant facts should have been notified.

Step 1

Ensure the timely notification of circumstances to your broker. This should occur as close as possible to the time you first became aware of the circumstances and during the policy period.

Step 2

Ensure that, where available, the notification provides information pertinent to the potential claim. If possible, the notification should also identity the potential claimant or claimants.

This early notification will ensure an insurer is not able to invoke a policy exclusion for 'non-disclosure of prior known circumstances' as a reason for denying cover.

Once the notification is made, the onus falls on the insurer to ask for further factual information if it considers the facts initially notified may be insufficient.

Step 3

Step 3 involves the determination of the deductible and occurs where the director is the subject of an Official Notice, a writ or a demand for compensation.

All of the above will satisfy the definition of a 'Claim' against the director for the purpose of the Policy, subject of course to any exclusions in the Policy or whether the Claim is under the deductible.

The question of how the deductible applies depends upon:

  • whether the Director is able to be granted an indemnity under the Company Deed;

  • whether the Company declines to indemnify the Director under the terms of the Deed; or

  • where indemnification by the Company is precluded under the Corporations Act.

It is recommended that you seek specialist advice from your broker or solicitor to assist you with the determination of your deductible.

Step 4

Step 4 involves invoking your right to the advancement of defence costs.

An insurer may not unreasonably refuse to advance defence costs, however if indemnity under the Policy is later denied, then the director is liable to repay the monies advanced.

There are many traps around advancement of defence costs and once again it is recommended that you seek specialist advice from your broker or solicitor to assist in this situation.

Examples of D&O Insurance claims

D&O Insurance Claims can arise from various relationships: between the company and shareholders, employees, creditors, competitors, customers and others.

Shareholders

Circumstances

D&O Insurance Cover

A Shareholder of a co-operative brought an action against the Company and the entire Board of Directors when they exercised a discretion to refuse to register a transfer of shares from the shareholder to a new member

The company and directors share representation. Agreed allocation of defence costs, in this case 50%, incurred up until resolution. Costs exceeded $100,000

A shareholder brought a derivative action against directors alleging misuse of company funds when they chose to resist a takeover attempt and embarked on an expensive advertising campaign

Defence costs for successful defence of action of over $500,000.

Employees

Circumstances

D&O Insurance Cover

A senior employee was transferred interstate. He alleged that he moved on the basis of promises regarding equity in the company. He later resigned after pressure from senior management regarding his performance. Soon afterwards the company, and two of its directors, were sued when the employee alleged constructive termination. His claim included the value of the equity he allegedly was promised

The claim ran into seven figures and costs of defending were several hundred thousand dollars. As the company and two directors share common representation, the costs and ultimate settlement were shared on a 50/50 basis

Creditors

Circumstances

D&O Insurance Cover

An affidavit given by a director contained a statement that the company had sufficient resources to meet a solicitor’s fee but, before the fee was paid, the company went into liquidation. The solicitor sought over $100,000 from the director personally.

Defence costs and settlement were over $100,000.

A family company went into liquidation with serious debt. A husband and wife were sued as directors for incurring debts when they were unable to repay them. It was alleged the company was technically insolvent for some time and that the directors incurred over $1m in debts for which they were responsible

Defence costs and six figure settlement paid on behalf of the directors

A purchaser of a company sought an eight figure damages from the vendor and its directors. He alleged he was misled as to the value of the company on its sale three years earlier. It was alleged the directors misrepresented the accounts making false and misleading statements during the sale process

Defence costs for directors and portion of settlement

Competitors

Circumstances

D&O Insurance Cover

It was alleged that the company and its directors misappropriated a software system they were testing

Defence costs and settlement of over $1m.

Customers

Circumstances

D&O Insurance Cover

The company and its Managing Directors were sued for misleading and deceptive conduct. They advertised their product, stating it was good for you when there was no scientific literature to support the assertion

Defence costs for Managing Director - $50,000.

Regulators 

Circumstances

D&O Insurance Cover

The insured and several directors were prosecuted by the ACCC for breaches of the Trade Practices Act, alleging anti-competitive conduct in that the directors had colluded with a competitor to restrict price competition

Defence costs collectively for directors (who for 5 directors had three different sets of lawyers) were over $1m.

As a result of a serious work accident a director of a company was compelled to appear at a coronial inquest. He was later charged with occupational health and safety breaches arising from the accident

Costs of representation at the Coronial Inquest and Defence. Costs arising out of prosecution of over $100,000.