D&O insurance - Are directors obtaining adequate protection for their potential liabilities?
Having been asked to review a D&O policy this week for a client, I thought there may be some benefit in setting out some of the issues which confront D&O policy holders in wake of the state of disequilibrium introduced by The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. While almost all large financial institutions would be significantly self-insured, not every institution that the ripple effect, that is the Royal Commission, will touch, will be. The reverberations being created by the Royal Commission are a salutary reminder for directors and corporations not to be complacent about indemnity cover.
D&O insurance is an important asset to corporations and directors operating in Australia, and experience suggests that the most used aspect of cover is the indemnification of costs incurred in regulatory and other formal investigations. In particular, the findings of the Royal Commission, may mean an increase in regulatory inquiries into, and civil penalties and criminal prosecutions of, directors and corporations.
A central question arising for some at the moment is whether the Royal Commission is an examination of professional services or a corporate governance and supervision issue. The answer to this question may impact whether cover is available and which policy responds. For example, it is not unusual for Management Liability and D&O policies to contain Professional Services exclusions. As the Royal Commission centres on the misconduct in the financial services sector, there may be arguments that the services under investigation, or requiring an insured’s attendance, may be professional in nature and are excluded.
As costs of preparing for and appearing in the Royal Commission and similar inquiries or regulatory investigations or prosecutions, which may ensue the Royal Commission, can be considerable, directors and their corporations should consider if the policy provides for defence costs in claims where it may be unclear whether the policy will or will not apply. Some D&O policies limit costs of representation to circumstances where “a wrongful act” is alleged against the “insured person”, other policies agree to pay defence costs regardless of whether a wrongful act is alleged. It is not unusual for policies to carve out “inquiry costs” from the definition of “Claim or Loss” (frequently on the basis that there is no demand for compensation by a third party). Policies will typically require that any defence, inquiry and/or representation are “reasonably incurred” (this applies to the rates charged, the hours worked and the reasonableness of that work having been carried out). Some policies provide automatic consent to defence costs subject to the Insured appointing a panel firm to represent them, but if you wish to retain your own representatives then consent is usually required.
In disputes as to indemnity by insurers, for example, regarding unproven allegations of dishonest or fraudulent behaviour, much will turn on the particular wording of the policy as the two decisions of the High Court in Rich v CGU Insurance Limited; Silbermann v CGU Insurance Limited  HCA 16 and Wilkie v Gordian Runoff Limited  HCA 17 amply demonstrate. These cases illustrate the difference between “the insurer may pay” and “the insurer will pay” defence costs clauses.
One repercussion predicted to emerge from the Royal Commission, putting aside the increase in premiums (which are already apparent by grace of other factors – the increase class actions, being an example), is stricter regulations and focus on underwriting discipline by insurers. While it is presently common for professional indemnity and D&O insurance policies to extend cover for civil fines and penalties, there is a suggestion that this may be reviewed or restricted. Even if breadth of coverage were to remain largely stable, insurers appear to have little appetite to entertain further coverage enhancement. Therefore, it is essential that directors and corporations periodically review and seek to understand the coverage their D&O policies offer, including considering the exclusions and the claims process as governed by the policy.
Bridie regularly advises her clients, many of whom are in-house counsel, on insurance policies, including claims sought to be made, declinatures and the suitability of policies for the businesses they represent. Bridie can also assist with submissions and the preparation of material in support of applications for internal review of decline decisions.
Liability limited by a scheme approved under Professional Standards Legislation