When you consider the penalties, disqualification and costs orders imposed on the Star Entertainment executives in ASIC v Bekier, and the time and legal costs incurred by the defending non-executive directors, it is time to review your Director and Officer Liability cover to assess whether it is adequate and appropriate for a similar regulatory action.
One way of testing your cover is to do some worked examples of who is covered, what can’t be legally covered, and the monetary limits and cover exclusions.
Are CEO’s, CFO’s, company secretaries and other officers who are not directors covered?
You need to regularly confirm that your company has in place Directors’ and Officers’ Liability Insurance which gives you adequate protection in conjunction with the terms of the company’s Constitution and any indemnity deed, unless fraudulent or criminal activity or deliberate or reckless wrongful conduct is actually proven.
Insurance provides funds firstly for legal defence costs and secondly for the payment of fines and penalties, if legally permissible. These costs may be otherwise beyond the capacity of the company and its directors and officers. But insurance is unlikely to cover loss of income or the consequences of disqualification from managing a company.
Important questions
You need to know the answers to such questions as:
• Which “officers” are covered?
• Are you insured for legal defence costs?
• Are you insured for investigation costs?
• If so, are the amounts sufficient?
• Are you entitled to payment as legal defence costs are incurred (or in advance) or only as reimbursement? Is such payment by the insurer, if allowed by law, mandatory or discretionary? If mandatory, does the policy provide that legal defence costs will be paid within a specified time?
• Does the insurer reserve the right to recover any defence costs from the directors, officers or the company if it is subsequently established that they were not entitled to the defence costs advanced?
• Are you insured for compensation orders (if permitted by law)?
• Are you insured for civil pecuniary penalties (if permitted by law)?
• Are you covered only for costs involved in third party claims, or for costs in respect of disputes with the company as well?
• Is the insurance for a fixed amount per claim or for an aggregate amount of all claims in all types of cover under the policy in any one year?
• If the policy has an overall aggregate limit of liability covering all the different types of cover, are there are sub-limits or will a high claim in one area of the policy in one year limit the amount available in other areas of the policy in that year?
• What are the grounds for the insurer refusing cover?
• Is the policy available in the event of a company’s insolvency for the benefit of the company’s directors and officers (and not the company’s liquidator) and even if the company cannot pay the excess?
• Are the definitions of “Claim” (does it include an investigation?), Civil Liability”, “Loss” (does it include restitution or compensation?), “Investigation” and “Defence Costs”, as well as the Insuring Clause, wide enough?
• Are you insured after you cease your position with the company?
The answers to these questions will depend upon the specific definitions and wording of the policy and ultimately how they apply to the specific claim that is being made against you.
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Author: David Jacobson
Principal, Bright Corporate Law
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About David Jacobson
The information contained in this article is not legal advice. It is not to be relied upon as a full statement of the law. You should seek professional advice for your specific needs and circumstances before acting or relying on any of the content.
