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Time for a closer look at your D&O policy

Directors often assume their directors and officers (D & O) policy will protect them from the key risks they face as a director.  Recent developments highlight this is not always the case.

The scope of D & O policies and their effectiveness in certain circumstances can vary widely, particularly where a company gets into financial difficulties.  This can lead to situations where directors are effectively left with no insurance protection from claims and the risk of significant personal financial liability.

While directors of public companies and large private companies generally ensure they are covered by a D & O policy they should go further than simply checking a policy is in place.

The terms of D & O policies can differ significantly.  In particular, it is important to check the scope of the D & O policy as well as what is excluded from cover.  As the activities of companies can change over time, it is important to review this on a regular basis not just at the outset. 

Directors should take particular care if their company is in financial difficulties.  It is not uncommon in these circumstances for D & O policies to lapse due to non payment of the premium by the company.  Furthermore, if a company goes into administration or liquidation then administrators and liquidators often don't renew D & O policies.  

Most D & O policies are written on a 12 monthly basis and provide cover for claims or circumstances notified to the insurer during the policy period.  While there is sometimes scope for directors to make claims under a D & O policy that has lapsed, their ability to do so will always depend upon the particular circumstance and the terms of the D & O policy.

The recent rise in shareholder class actions, often supported by litigation funders, and enforcement action taken by the corporate regulator, such as the recent James Hardie case, have increased the risks for directors under many D & O policies. 

D & O policies usually include three separate insuring clauses.  Side A covers claims for which the company has not provided an indemnity to directors.  Side B reimburses the company for payments made to directors under an indemnity.  It has also become common over the last decade to cover the company under Side C for shareholder claims.

The problem for directors is that D & O policies typically contain an aggregate payout limit for the three insuring clauses provided in their D & O policy.  It is the third insuring clause, Side C, which can leave directors personally liable as it protects the company itself rather than directors from “securities claims” including shareholder claims. 

Side C clauses in D & O policies have been heavily relied on by companies in the recent wave of shareholder class actions.  This has led to situations where the aggregate payout limit of a D & O policy is reached prior to directors seeking protection under the policy. 

Given the current difficult economic climate, existing and potential directors should have a closer look at their D & O policies.  In particular, they should check the scope of their policy, the exclusions to the policy and whether there is a risk of not being covered under their policy in the event of a large claim, such as a shareholders claim, being made against their company. 

Please contact Geoff Green on 03 8319 1866 or at geoff.green@bsglegal.com.au or Jai Singh on 03 8319 1872 or at jai.singh@bsglegal.com.au for further information.



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