directors' and officers' liability insurance · types of d&o claims the following are...

Directors' and officers' liability insurance

by Gavin Beardsell and Ronan Guyomarc'h, Clyde & Co with

Practical Law Dispute Resolution

Directors' and officers' liability insurance in Australia, Practical Law ANZ Practice Note...

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This note provides an overview of directors' and officers' (D&O) liability insurance in Australia. It covers the risks faced by directors and officers of companies in performing their functions, the types of claims giving rise to civil and criminal liability against companies, directors and officers, and the features of typical D&O liability insurance policies which provide coverage in respect of such claims.

Scope of this note

Directors and officers of companies are subject to numerous common law and statutory duties and they face arange of claims giving rise to civil and criminal liability for breaching those duties. Directors and officers may incurcivil liability for damages or civil penalties to many parties, including their company, another director or officer of thecompany, a shareholder, employee, creditor or customers of the company or a regulator. The amount of these civilliabilities can be millions of dollars. Directors and officers may also be liable to pay a significant amount of criminalfines and penalties.

Increased corporate regulation, robust shareholder activism and the growth of third party litigation funding have allcontributed to the challenges faced by directors and officers. In Australia, there are an increased number of D&Oclaims which have become larger in value, more complex and costlier to resolve. The principal causes of theseclaims are non-compliance with law and regulations, negligence, maladministration or lack of control, breach of trustor fiduciary duty and inadequate or inaccurate disclosure.

The amount of the legal and other professional costs incurred by a director or officer in the defence of claim againstthem or in connection with an investigation by an official body is often substantial and the process can take up toseveral months or even years of their valuable management time, regardless of whether or not the director or officeris ultimately held liable for such claims or proceedings are brought against them as a result of such investigations.After a claim is made against a director or officer for any alleged wrongdoing in performing their functions or aninvestigation is commenced in connection with the director or officer, he or she has either of two primary sourcesof protection:

• Turn to the company and seek indemnification (see Company indemnification).

• If the company declines indemnification, seek indemnity directly from the company's D&O liability insurancepolicy (see D&O insurance).

This note provides an overview of the D&O landscape in Australia, including the range of civil and criminal liabilitiesthat companies, directors and officers may incur as a result of claims made against them and the operation ofD&O insurance in relation to such claims. D&O policies do not provide coverage for all claims against companies,directors and officers. Claims that are covered by other types of insurance policy are beyond the scope of this note.


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Sources of D&O claims

Most activities of a company require the involvement of its management and board of directors. In turn thesestakeholders' decisions may be open to criticism and ultimately lead to claims made against them or the company.The sources of claims made against companies, directors and officers are wide-ranging.

The company itself

A company may bring a claim against its directors and officers for breach of their statutory and common law dutiesowed to the company.

Competitors

Any contravention of competition laws could result in competitors bringing an action against a company or itsdirectors and officers.

Customers

Directors and officers may face claims made by consumers in relation to goods and services supplied by thecompany.

Directors and officers

A director or officer may bring a claim against a company or its directors and officers, to vindicate their personallegal rights.

Employees

Directors and officers may have to defend claims by employees of the company in relation to their employment.

Insolvency practitioners and creditors

If a company is insolvent, a liquidator of the company can bring a claim against its directors and officers for thebenefit of its creditors or a creditor of the company can bring a claim against the company or its directors andofficers (see Voidable transactions and Director's duty to prevent insolvent trading). A liquidator or administrator ofa company also has powers under sections 596Aand 596B of the Corporations Act 2001 (Cth) (CA 2001) to publiclyexamine any directors or officers about the affairs of the company in liquidation or administration.

Investors

Investors, including debenture holders, have brought large class actions against companies, directors and officers.The amount of the settlements paid and legal costs incurred in these class actions usually run to many millionsof dollars.

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Directors and officers may require legal representation in relation to an official body's investigation into the affairs ofa company. For example, the Australian Securities and Investments Commission (ASIC) has power to make suchinvestigation as it thinks it expedient for the due administration of the corporations legislation. ASIC may issue anotice to a director or officer requiring him or her to:

• Give to ASIC all reasonable assistance in connection with its investigations and to appear before ASIC forexamination on oath and to answer questions.

• Produce specified books relating to the affairs of a company.

The documentary and other evidence gathered by ASIC during its investigation may be used by ASIC in civil orcriminal proceedings brought by ASIC against the company or its directors and officers, or by third parties to supportclaims for damages against the company or its director and officers.

Other official bodies also have powers to investigate and pursue civil or criminal penalties for wrongful conductengaged in by companies, directors and officers. These bodies include:

• Independent Commission Against Corruption (ICAC) which has jurisdiction to investigate corrupt conduct in theNew South Wales public sector, being conduct that adversely affects the probity of the exercise of an officialfunction by a public official (see ICAC v Cunneen [2015] HCA 14).

• Australian Competition and Consumer Commission (ACCC) which is an independent statutory governmentauthority having power to bring proceedings in relation to contraventions of the provisions of the Competitionand Consumer Act 2010 (Cth) (CCA).

Shareholders

A number of class actions have been brought against listed companies and their directors and officers by, and onbehalf of, the shareholders of such companies seeking to recover large amounts of damages for financial lossessuffered by them. These collective actions often arise from a company's failure to comply with continuous disclosurerules or from misleading information contained in the company's disclosure documents (see Practice note: overview,Class actions in Australia).

Directors and officers may also face derivative claims from a company's shareholders bringing an action on behalfof the company (see Derivative actions) and claims by shareholders following the merger of two companies or theacquisition of one company by another company.

Tax authorities

The Australian Taxation Office (ATO) may bring claims against directors in relation to the non-payment of acompany's tax liabilities (see Taxation Administration Act 1953 (Cth)) and repayments of amounts in respect ofspecific tax liabilities made to a company's liquidator by the ATO as a result of voidable transactions of the company(see Voidable transactions).

Regulators and government bodies

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Cyber risk is one of the top emerging risks faced by companies. Directors and officers are particularly concernedabout the risks of unauthorised access to and disclosure of confidential information held by a company, caused bya cyber-attack by an outside third party.

In February 2018, a new mandatory data breach notification regime will come into force in Australia as a resultof amendments to the Privacy Act 1988 (Cth). Under this regime, a company holding personal information will berequired to report certain data breaches to the Federal Privacy Commissioner and possibly affected natural persons.Prior to the introduction of the new regime, it would be prudent for directors and officers to review their company'sprocedures in relation to privacy compliance, the risks associated with cyber security and the need for the companyto purchase cyber risk insurance. After the introduction of the regime, there will be a real risk to companies, directorsand officers of class actions and collective complaints arising from a data breach reported in compliance with themandatory data breach notification obligations.

Climate change

Directors and officers who fail to consider foreseeable climate-change related risks when developing a company'soperational strategy may be exposed to civil liability for breach of their duty of care owed to the company. A listedcompany may also be exposed to civil liability for failing to disclose climate-change related risks to a market or bymaking misleading disclosures with respect to such risks.

It is widely accepted that the consequences of climate change are difficult to predict; however the weight of scientificand economic evidence available to directors and officers may make it more difficult for them to successfully defendthemselves on the basis that the effects of climate change were not reasonably foreseeable.

Types of D&O claims

The following are examples of the many types of claims which give rise to civil and criminal liability againstcompanies, directors and officers. The operation of D&O insurance policies in relation to such claims will beconsidered later in this note (see D&O insurance).

Civil liability for damages, compensation and penalties

Breach of duties owed to the company

Directors and officers may face claims made by their company for breach of their duties owed to the company underthe CA 2001. These statutory duties are in addition to equivalent duties at common law or in equity, including theduty of care that arises under the common law principles governing liability for negligence.

The general civil obligations of directors and officers of a company under the CA 2001 are to:

• Exercise their powers and discharge their duties with the degree of care and diligence that a reasonable personwould exercise if they were a director or officer of a company in the company's circumstances and occupied theoffice held by, and had the same responsibilities with the company as, the director or officer (section 180(1)). Adirector or officer who makes a business judgment is taken to meet the requirements of section 180(1), and theirequivalent duties at common law and in equity, in respect of the judgment if they make the judgment in goodfaith for a proper purpose, do not have a material personal interest in the subject matter of the judgment, informthemselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate

Emerging risks - Cyber attacks and data breaches

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and rationally believe that the judgment is in the best interests of the company (the business judgment rule(section 180(2)).

• Exercise their powers and discharge their duties in good faith in the best interests of the company and for aproper purpose (section 181(1)).

• Not improperly use their position to gain an advantage for themselves or someone else or cause detriment tothe company (section 182(1)).

• Not improperly use information obtained because they are, or have been, a director or officer to gain anadvantage for themselves or someone else or cause detriment to the company (section 183(2)).

Sections 180 to 183 of the CA 2001 are civil penalty provisions (section 1317E, CA 2001). A court may make acompensation order against a director or officer of a company, if the director or officer contravened any of these civilpenalty provisions and the company suffered damage as a result of the contravention (section 1317H(2), CA 2001).

See also Civil penalty proceedings by ASIC.

Derivative actions

Directors and officers may face derivative claims from a company's shareholders, or its other directors or officers,bringing an action on behalf of the company.

The leave of a court is required to bring a derivative action in the company's name (section 236, CA 2001). Thecriteria for obtaining such leave are that:

• It is probable that the company will not itself bring the proceedings or properly take responsibility for them.

• The person applying for leave is acting in good faith.

• It is in the best interests of the company that the person be granted leave.

• There is a serious question to be tried.

• The person gave prior written notice to the company of the intention to apply for leave or it is appropriate togrant leave even though no such notice was given.

(Section 237, CA 2001.)

If a derivative claim is brought in the name of a company against a director or officer for breach of their duties owedto the company, the director or officer will not be entitled to an indemnity from the company in respect of such liability(see Company indemnification).

Voidable transactions

Directors and officers may also face claims brought by a company's liquidator in relation to one or more transactionsof the company entered into when the company was insolvent or nearing insolvency. Such a transaction is voidableif it is:






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• An insolvent transaction.

• An uncommercial transaction.

• An unfair preference given by the company to one of its creditors.

• An unfair loan to the company.

• An unreasonable director-related transaction.

Where a court is satisfied that a transaction of the company is voidable, the court may make a number of orders,including an order directing a party to the transaction or a person who received a benefit because of the transactionnot acting in good faith, to pay to the company an amount equal to some or all of the money that the company paidunder the transaction (see sections 588FE, 588FF and 588FG, CA 2001 and for a recent example, see Pearce vGulmohar Pty Ltd [2017] FCA 660). If the court makes such an order against the Commissioner of Taxation becauseof the payment by the company of an amount in respect of a specific tax liability, each person who was a directorof the company when the payment was made is liable to indemnify the Commissioner of Taxation in respect of anyloss or damage resulting from the order (section 588FGA, CA 2001). Such loss or damage usually comprises theamount paid by the Commissioner plus interest and legal costs.

Director's duty to prevent insolvent trading

A company's liquidator or creditor may bring claims against the company's directors for breach of their duty toprevent insolvent trading by the company under section 588G(2) of the CA 2001, which is a civil penalty provision.

Section 588G applies if:

• A person is a director of a company at the time when the company incurs a debt;

• The company is insolvent at that time, or becomes insolvent by incurring that debt, or by incurring at that timedebts including that debt; and

• At the time, there are reasonable grounds for suspecting that the company is insolvent, or would so becomeinsolvent, as the case may be.

(Section 588G(1), CA 2001).

By failing to prevent the company from incurring the debt, the director contravenes section 588G if he or she is awareat that time that there are such grounds for so suspecting or a reasonable person in a like position in a company inthe company's circumstances would be so aware (section 588G(2), CA 2001).

A company's liquidator may recover compensation from a director who has contravened section 588G(2) as a debtdue to the company, an amount equal to the amount of a creditor's loss or damage suffered in relation to the debtbecause of the company's insolvency, where the debt was wholly or partly unsecured when the loss or damage wassuffered and the company is being wound up (section 588M(2), CA 2001).

A creditor may, with the written consent of the company's liquidator or the leave of a court, bring proceedings torecover compensation from the director, as a debt due to the creditor, an amount equal to the amount of the loss

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or damage (sections 588M(3), 588R, 588S and 588T, CA 2001). A creditor may not commence such proceedingsif the company's liquidator has:

• Applied to a court under section 588FF in relation to the debt, or in relation to a transaction under which thedebt was incurred (see Voidable transactions).

• Begun proceedings under section 588M in relation to the incurring of the debt.

• Intervened in an application for a civil penalty order against a director in relation to a contravention of section588G(2) in relation to the incurring of the debt.

(Section 588U, CA 2001).

There is a distinction between the amount of the debt and the loss or damage suffered by the creditor. It is thelatter that is recoverable by the liquidator or creditor. In ascertaining the creditor's loss or damage, the amount ofthe debt is the starting point and will often reflect the quantum of the loss (for example, see Perrine v Carrello [2017]WASCA 151).

The duty to prevent insolvent trading and the associated recovery provisions are important because they provide amechanism to allow enforcement against a director's personal assets for the benefit of a company's creditors.

Breach of continuous disclosure obligations

A listed company may face a claim for contravention of its continuous disclosure obligations under section 674(2) ofthe CA 2001, which is a civil penalty provision. If the company is listed on the Australian Securities Exchange (ASX),ASX Listing Rule 3.1 provides that once a company is or becomes aware of any information concerning it that areasonable person would expect to have a material effect on the price or value of the company's securities, thecompany must immediately tell the ASX that information. A director or officer who is involved in a listed company'scontraventions of its continuous disclosure obligations contravenes section 674(2A) of the CA 2001 which is alsoa civil penalty provision.

A court may order a liable person to compensate another person (including a corporation) for damage suffered asa result of the liable person's contraventions of section 674(2) or section 674(2A) of the CA 2001 (section 1317HA,CA 2001).

Misleading or deceptive conduct: Corporations Act 2001

The CA 2001 also contains several provisions concerning civil liability for misleading or deceptive conduct and falseor misleading misrepresentations in relation to financial services and financial products, including:

• A person must not make a statement, or disseminate information, if the statement or information is false in amaterial particular or is materially misleading and the statement or information is likely to induce persons to applyfor financial products or dispose of or acquire financial products, or to have the effect of increasing, reducing,maintaining or stabilising the price for trading in financial products on a financial market, and the person doesnot care whether the statement or information is true or false, or the person knows, or ought reasonably tohave known, that the statement or information is false in a material particular or is materially misleading (section1041E(1), CA 2001).


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• A person must not engage in conduct, in relation to a financial product or a financial service, that is misleadingor deceptive or is likely to mislead or deceive (section 1041H(1), CA 2001).

A person who suffers loss or damage by conduct of another person that contravenes section 1041E or section1041H of the CA 2001 may recover the amount of the loss or damage against the other person or against anyperson involved in the contravention (section 1041I, CA 2001).

Misleading or deceptive conduct: ASIC Act

The Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) contains similar provisionsconcerning civil liability for misleading or deceptive conduct and false or misleading misrepresentations in relationto financial services as those contained in the CA 2001, including:

• A person must not, in trade or commerce, engage in conduct in relation to financial services that is misleadingor deceptive or is likely to mislead or deceive (section 12DA(1), ASIC Act).

• A person must not, in trade or commerce, in connection with the supply or possible supply of financial services,or in connection with the promotion by any means of the supply or use of financial services, make a false ormisleading representation that:

• services are of a particular standard, quality, value or grade;

• a particular person has agreed to acquire services;

• purports to be a testimonial by any person relating to services;

• services have sponsorship, approval, performance characteristics, uses or benefits; or

• the person making the representation has a sponsorship, approval or affiliation

(section 12DB(1), ASIC Act).

A person who suffers loss or damage by conduct of another person that contravenes section 12DA(1) or section12DB(1) of the ASIC Act may recover the amount of the loss or damage against the other person or against anyperson involved in the contravention (section 12GF, ASIC Act).

Anti-competitive conduct: Competition and Consumer Act 2010 (Cth)

Part IV of the CCA contains a number of competition law provisions which prohibit restrictive trade practices,including cartel conduct, anti-competitive agreements, misuse of market power, exclusive dealing, resale pricemaintenance and mergers that would result in a substantial lessening of competition in a market. Civilremedies, including pecuniary penalties and damages, are available against companies, directors and officers forcontraventions of the competition law provisions.

Misleading or deceptive conduct and consumer protections: Australian Consumer Law

The Australian Consumer Law (ACL), being Schedule 2 of the CCA, contains a number of consumer protectionprovisions, including section 18 which provides that a person must not, in trade or commerce, engage in conductthat is misleading or deceptive or is likely to mislead or deceive. Section 18 of the ACL does not apply to conduct





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engaged in with respect to financial services and financial products. A person may recover damages against acompany, director or officer, if the person suffers loss or damage because of conduct engaged in by the company,director or officer respectively in contravention of section 18 of the ACL, or against any person involved in thecontravention (section 236, ACL).

Under section 224 of the ACL, a director or officer of a company may be liable to pay a pecuniary penaltyfor a contravention of several other consumer protection provisions contained in the ACL, including provisionsconcerning unconscionable conduct, false or misleading representations in relation to the supply of goods orservices, unsolicited consumer agreements, supplying consumer goods that do not comply with safety standards, afailure to notify certain product-related deaths or serious injuries and a failure to comply with a substantiation notice.

Workplace relations contraventions: Fair Work Act 2009 (Cth)

Companies may face claims brought by their employees and other workers for contraventions of the workplacerelations provisions of the Fair Work Act 2009 (Cth) and in particular, civil remedy provisions concerning the NationalEmployment Standards, modern awards, enterprise agreements, workplace determinations, national minimumwage orders, unfair dismissal and bullying at work.

Failure to discharge directors' duties: Taxation Administration Act 1953 (Cth)

The Commissioner of Taxation may commence proceedings against directors of a company to recover a penaltywhere the directors fail to discharge their duties to cause the company to comply with its obligation to pay to theCommissioner:

• Withheld amounts, including PAYG liabilities retained from wages of employees of the company.

• The superannuation guarantee charge imposed on any superannuation guarantee shortfall not paid by thecompany to its employees' superannuation funds.

The directors will be personally liable to pay a penalty equal to the unpaid amount of the company's liability underits obligations, unless they take one of the following steps:

• Cause the company to pay this amount within 21 days after the Commissioner gives a written notice to thedirectors.

• Enter into an arrangement with the Commissioner to make payments by instalment.

• Place the company into voluntary administration or liquidation.

(See Division 269, Schedule 1, Taxation Administration Act 1953 (Cth).)

A director who avoids a liability to pay a penalty under the Taxation Administration Act by causing a company to paythe amount of its liability, may later be liable to indemnify the Commissioner under section 588FGA of the CA 2001,if the payment by the company is a voidable transaction and the court makes an order under section 588FF of theCA 2001 directing the Commissioner to pay to the company an amount equal to its payment to the Commissioner(see Voidable transactions).


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A director or officer of a company will have an accessorial liability if he or she is involved in a contravention of astatutory provision by the company or another person.

A person is involved in a contravention of a provision of the CA 2001 if, and only if, the person has acted in anyof the following ways:

• Aided, abetted, counselled, procured or induced the contravention.

• Been in any way directly or indirectly knowingly concerned in or party to the contravention.

• Conspired with others to effect the contravention.

(Section 79, CA 2001.)

Similar accessorial liability provisions are contained in section 12GBA of the ASIC Act, section 76 of the CCA,section 224 of the ACL and section 550 of the Fair Work Act. There is a similarity between statutory accessorialliability and third party accessorial liability in equity for knowing assistance in a breach of fiduciary duty under Barnesv Addy (1874) LR 9 Ch App 244.

Regulatory investigations

ASIC has powers under the ASIC Act to investigate corporate activities and suspected breaches of duties bydirectors and officers. ASIC's powers extend to compelling the production of documents and requiring directorsand officers to attend an examination, subject to those individuals' right to claim privilege against self-incrimination.An investigation by ASIC may result in it bringing civil proceedings or criminal proceedings (which are ordinarilyconducted by the Office of the Commonwealth Director of Public Prosecutions) against a company and its directorsand officers.

Civil penalty proceedings by ASIC

Corporations Act 2001

ASIC can bring civil proceedings against companies, directors and officers for a contravention of a civil penaltyprovision of the CA 2001. These civil penalty provisions are specified in section 1317E of the CA 2001 and includesections 180, 181, 182, 183, 588G and 674 of the CA 2001 (see Civil liability for damages, compensation andpenalties). Companies, directors and officers may also be liable to pay a civil penalty for a contravention of a numberof other civil penalty provisions, including sections 1041A (market manipulation) and 1041B (false trading and marketrigging) of the CA 2001. If a court makes a declaration that a person has contravened a civil penalty provision of theCA 2001, ASIC can then seek an order under section 206C of the CA 2001 disqualifying the person from managingcompanies or a pecuniary penalty order under section 1317G of the CA 2001 against the person or the company(see Note 1 to section 1317E, CA 2001).

Chapter 2 of the Criminal Code, being the Schedule to the Criminal Code Act 1995 (Cth), does not apply to civilproceedings brought for a contravention of a civil penalty provision of the CA 2001 (see Australian Securities andInvestments Commission, in the matter of Whitebox Trading Pty Ltd v Whitebox Trading Pty Ltd [2017] FCAFC 100).

Accessorial liability


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ASIC can also bring civil proceedings seeking a pecuniary penalty order under section 12GBA of the ASIC Act against companies, directors and officers for a contravention of some provisions of the ASIC Act, including section 12DB (false or misleading representations). By way of example, see Australian Securities and Investments Commission v Huntley Management Ltd [2017] FCA 770.

Legal costs and civil penalties

Legal costs incurred by and civil penalties imposed on directors and officers in civil penalty proceedings will usually

be covered under a D&O policy, subject to conduct exclusion (see D&O insurance).

Criminal proceedings

Corporations Act 2001

A failure to comply with certain provisions of the CA 2001 may be made an offence, either by express languagewithin the provision or by reason of the operation of section 1311 of the CA 2001. For example, section 184 of theCA 2001 makes criminal offences in relation to a director or officer not acting in good faith, misusing their positionand misusing information and a number of the civil penalty provisions of the CA 2001, including sections 1041A and1041B, are made offences by virtue of the operation of section 1311 of the CA 2001.

A person who is guilty of an offence against the CA 2001 is punishable, on conviction, by a penalty (see section1311, CA 2001). The penalty applicable to the offence is a fine or imprisonment, or both. These penalties areset out in Schedule 3 to the CA 2001 or specified in other provisions of the CA 2001 depending on the particularprovision which has been contravened. Unlike civil proceedings, Chapter 2 of the Criminal Code applies to criminalproceedings brought for offences against the CA 2001.

Work Health and Safety Act 2011 (Cth)

Directors and officers of a company may also face criminal proceedings for strict liability offences imposed by theWork Health and Safety Act 2011 (Cth) (WHS Act). Under the WHS Act, a director or officer of a company conductinga business must exercise due diligence to ensure that the company complies with its duties and obligations, includingthe primary duty of care to ensure, so far as is reasonably practicable, the health and safety of workers engagedby the company and workers whose activities are directed by the company, while the workers are at work in thecompany's business (see sections 19 and 27,WHS Act).

A director or officer commits a criminal offence under the WHS Act if they:

• Have a health and safety duty and they, without reasonable excuse, engage in conduct that exposes an individualto whom that duty is owed to a risk of death or serious injury or illness, and is reckless as to the risk to anindividual of death or serious injury or illness (Category 1 offence).

• Fail to comply with their health and safety duty and the failure exposes an individual to a risk of death or seriousinjury or illness (Category 2 offence).

• Fail to comply with their health and safety duty (Category 3 offence).

The WHS Act imposes penalties comprising fines or imprisonment, or both for these offences (see sections 31-33,WHS Act).

ASIC Act













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Competition and Consumer Act 2010 (Cth)

Criminal fines and imprisonment are available for a contravention of the cartel conduct provisions contained in PartIV of the CCA.

Legal costs and criminal penalties

Legal costs incurred by directors and officers in criminal proceedings will usually be covered under a D&O policy,subject to a conduct exclusion and a clawback of such costs if it is later determined that there is no coverage. Atypical D&O policy provides no coverage in respect of criminal penalties (see D&O insurance).

Company indemnification

Subject to a number of statutory prohibitions which will be described below, companies often agree to indemnifytheir directors and officers for any liability incurred by them in their capacity as a director or officer of the company.The indemnity is usually contained in the company’s constitutional documents or a deed of indemnity between thecompany and the director or officer. The terms of such a deed will often require the company to give the directoror officer access to documents and to maintain D&O liability insurance in favour of the director or officer during theterm of his or her office and typically for seven years after they cease to hold office.

Corporations Act 2001 prohibition on indemnity

The CA 2001 contains provisions which restrict a company's exemption and indemnification of its directors andofficers for their liability:

• A company must not exempt a person (whether directly or indirectly through an interposed entity) from a liabilityto the company incurred as a director or officer of the company (section 199A(1), CA 2001).

• A company must not indemnity a person (whether by agreement or by making a payment) against:

• certain liabilities (other than for legal costs) incurred as a director or officer of the company, being a liabilityowed to the company;

• a liability for a pecuniary penalty order under section 1317G of CA 2001 or a compensation order undersection 961M, section 1317H, section 1317HA or section 1317HB of the CA 2001; and

• a liability that is owed to someone other than the company or a related body corporate and did not ariseout of conduct in good faith.

(Section 199A(2).)

• A company must not indemnify a director or officer (whether by agreement or by making a payment) for legalcosts in some circumstances (section 199A(3), CA 2001). This prohibition applies to legal costs incurred indefending an action for a liability incurred as a director or officer of the company, if the costs are incurred indefending or resisting proceedings in which the director or officer is found to have a liability for which they couldnot be indemnified under section 199A(2) of CA 2001. The prohibition also applies to legal costs incurred indefending or resisting criminal proceedings in which the director or officer is found guilty or proceedings brought






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by ASIC or a liquidator for a court order if the grounds for making the order are found by the court to have beenestablished and to legal costs incurred in connection with proceedings for relief to the director or officer in whichthe court denies the relief.

Anything that purports to indemnify a director or officer against a liability, or exempt them from a liability, is void tothe extent that it contravenes section 199A of the CA 2001 (section 199C(2), CA 2001).

A company may be able to give to a director or officer a loan or advance in respect of the legal costs the subjectof the prohibition contained in section 199A(3) of CA 2001. The director or officer must repay to the company theamount of legal costs paid by the company, if these costs become costs for which the company must not give thedirector or officer an indemnity under section 199A(3) of CA 2001. Put another way, a company may give a financialbenefit to a director or officer by making payments in respect of legal costs incurred by them in defending an action,but the director or officer will be required to make a repayment of these costs if later they are found to have a liabilityfor which they could not be indemnified by the company or they are found guilty of a criminal offence, or the courtmakes an order against them or denies them relief (see section 212(2), CA 2001).

A company may indemnify its directors and officers by paying the premium for a D&O policy which provides coveragein respect of their liabilities, except a liability arising out of conduct involving a wilful breach of duty in relation to thecompany or a contravention of section 182 or section 183 of the CA 2001 (see D&O insurance).

ASIC Act prohibition on indemnity

A similar prohibition on indemnifying directors and officers is contained in section 12GBD(1) of the ASIC Act. Thisprovides, in effect, that a company must not indemnify a director or officer (whether by agreement or by making apayment) against the following liabilities incurred as a director or officer of the company:

• A liability to pay a pecuniary penalty under section 12GBA of the ASIC Act for contraventions of certain provisionsof the ASIC Act.

• Legal costs incurred in defending or resisting proceedings in which the director or officer is found to have sucha liability.

Anything that purports to indemnify a person against a liability is void to the extent that it contravenes section12GBD(1) of the ASIC Act (see section 12GBD(4), ASIC Act).

Competition and Consumer Act prohibition on indemnity

Section 77A of the CCA prohibits a company from indemnifying a director or officer against a liability to pay apecuniary penalty for a contravention of a competition law provision and legal costs incurred in defending or resistingproceedings in which the director or officer is found to have a liability to pay such a pecuniary penalty. Anythingthat purports to indemnify a person against a liability is void to the extent that it contravenes section 77A of theCCA (see section 77B, CCA).

Australian Consumer Law prohibition on indemnity

A further prohibition on indemnifying directors and officers is contained in the ACL. Section 229 of the ACL provides,in effect, that a company commits an offence if it indemnifies a director or officer (whether by agreement or bymaking a payment) against certain liabilities incurred as a director or officer, being a liability to pay a pecuniary








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penalty under section 224 of the ACL for contraventions of consumer protection provisions in the ACL and legalcosts incurred in defending or resisting proceedings in which the director or officer is found to have such a liability.

Anything that purports to indemnify a person against a liability is void to the extent that it contravenes section 229of the ACL (see section 230, ACL).

Limitations on indemnities

A company indemnity is likely to be comforting for a director or officer; however it is only as valuable as the company’sfinancial capacity or willingness to pay. If the company becomes insolvent or refuses to indemnify for whateverreason, the director or officer may have to finance a defence from his or her own resources.

The provisions of the CA 2001, the ASIC Act, the CCA and the ACL prohibit indemnification in certain circumstances,regardless of whether or not the company is willing to indemnify. A D&O policy is essential if the director or officerdoes not have the benefit of a company indemnity. A prudent director or officer might require a company to haveadequate D&O insurance cover in place before they join the company.

D&O insurance

The purposes of D&O insurance

D&O insurance is primarily designed to provide financial protection to directors and officers of a company for liabilityresulting from claims made against them in relation to their managerial decisions and actions. Directors and officersmake mistakes and while D&O insurance is not compulsory, a prudent director or officer will require the benefit ofpersonal asset protection provided by such insurance purchased by the company.

The CA 2001 prohibits a company from purchasing insurance for its directors and officers against a liability (otherthan one for legal costs) arising out of conduct involving a wilful breach of duty in relation to the company, improperuse of their position to gain an advantage for themselves or someone else or cause detriment to the company,or improper use of information obtained by them because they are, or have been, a director or officer to gain anadvantage for themselves or someone else or cause detriment to the company (section 199B, CA 2001). Anythingthat purports to insure a director or officer against a liability is void to the extent that it contravenes section 199Bof the CA 2001 (section 199C, CA 2001). To reflect these prohibitions, D&O policies typically contain a conductexclusion which excludes cover for claims arising out of conduct in respect of which a liability is the subject of aprohibition in section 199B of the CA 2001 (see Typical exclusions).

D&O insurance provides financial protection to a company where it has indemnified its directors and officers asthe policy will reimburse the company to the extent of such indemnification. The policy will also provide financialprotection for claims made against the company for breaches of securities law, if there is company securities claimscover (see Typical covers).

The insured's duty of disclosure

In applying for D&O insurance, a company must supply information to an insurer to enable it to assess the risk. Thecompany has a duty to disclose to the insurer, before the contract of insurance is entered into, every matter thatthe company knows, or a reasonable person in the circumstances could be expected to know, is a matter relevantto the insurer's decision whether to accept the risk and, if so, on what terms, having regard to factors including thenature and extent of the insurance cover to be provided under the contract of insurance and the class of persons









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who would ordinarily be expected to apply for insurance cover of that kind (section 21(1), Insurance Contracts Act1984 (Cth)) (ICA). This duty of disclosure does not require the company to disclose a matter that diminishes therisk, is of common knowledge, the insurer knows or in the ordinary course of its business as an insurer ought toknow or that as to which compliance with the duty is waived by the insurer (section 21(2), ICA).

A company will typically supply such information to an insurer by way of a proposal form. Where the company failedto answer or gave an obviously incomplete or irrelevant answer to a question in the proposal form about a matter,the insurer will be deemed to have waived compliance with the duty of disclosure in relation to the matter (section21(3), ICA).

An insurer may otherwise have a statutory right to avoid the contract of insurance or to reduce its liability in respectof a claim, if a company failed to comply with its duty of disclosure or made a misrepresentation to the insurer beforethe contract of insurance was entered into (section 28, ICA). Despite this, D&O insurers often agree to waive suchrights in relation to innocent non-disclosure and innocent misrepresentation (see Typical conditions).

Typical covers

A D&O policy is written on a claims made basis, meaning that it provides coverage for claims and investigationsfirst made during the policy period (typically 12 months) or the extended reporting period (see Typical extensions).

The insuring clauses of a D&O policy will usually provide coverage in categories as follows:

• Directors and officers liability (Side A) cover. The insurer will pay the loss for which a director or officer whois not indemnified by the company is personally liable resulting from a claim made against them for a wrongfulact committed in their capacity as a director or officer of the company.

• Company reimbursement (Side B) cover. The insurer will reimburse the company the loss for which it grantsindemnification to an insured person, as permitted or required by law, in respect of a claim made against theinsured person. On most occasions, Side B cover will be triggered when a company provides indemnity pursuantto a deed of indemnity in favour of the company's former or present directors and officers.

• Company securities claims (Side C) cover. The insurer will pay the loss for which the company is legallyliable arising from a claim made against the company for a wrongful act involving the violation of securities laws.

• Legal representation expenses cover. The insurer will pay the reasonable professional fees, costs, chargesand expenses which an insured person incurs on account of a formal criminal, administrative or regulatoryinvestigation, examination or inquiry of the company or the insured person brought by an official body havinglegal authority to conduct such investigation, examination or inquiry. The legal representation expenses coverwill typically operate in addition to the cover available under Side A or Side B for the directors' and officers' legaland other professional costs incurred in the defence of a claim.

Typical definitions

A number of definitions are found in a D&O policy wording and these vary from one policy to another; however keydefinitions tend to have common elements:








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• "Claim" means a written demand for damages or other legal remedy or a civil, criminal, administrative orregulatory proceeding or suit brought by a third party against an insured person or the company for a wrongfulact.

• "Deductible" means the amount that will be the responsibility of the insured to pay in respect of loss coveredunder the policy.

• "Defence costs" means reasonable legal and other professional fees, costs, charges and expenses incurred,with the insurer's prior written consent, in the investigation, defence, settlement or appeal of any claim madeagainst an insured.

• "Insured" means the company, its past, present and future subsidiaries and any insured person.

• "Insured person" means any past, present or future director or officer of the company and typically includes anemployee of the company acting in the course of his or her employment and a lawful spouse, domestic partneror estate of an insured person. The term "director" usually includes executive directors, non-executive directors,shadow directors and alternate directors. The term "officer" usually includes a company secretary and a personwho makes, or participates in making, decisions that affect the company's business. The definition of "insuredperson" will likely not include an administrator, external auditor, liquidator, receiver, receiver and manager, ortrustee in bankruptcy.

• "Investigation" means a formal or official criminal, administrative or regulatory investigation, examination orinquiry of the conduct of an insured person or into the affairs of the company brought by any regulator,government or administrative body legally empowered to conduct such investigation, examination or inquiry.

• "Investigation costs" means reasonable legal and other professional fees, costs, charges and expenses incurred,with the insurer's prior written consent, by or on behalf of an insured person in connection with such insuredperson preparing for and attending an investigation.

• "Limit of liability" means the amount which will be the insurer's maximum liability, in the aggregate, payableunder the policy for all covered loss arising from all claims made against all insureds during the policy periodand any extended reporting period.

• "Loss" means the amount which an insured is legally liable to pay resulting from a covered claim, includingdefence costs, legal representation expenses, compensatory damages, equitable compensation, statutorycompensation orders, judgments, settlements, claimant's costs, interest, civil fines and penalties. The definitionof "loss" will likely also provide cover for punitive, exemplary, aggravated and multiple damages. "Loss" will notinclude criminal fines and penalties, taxes and payments which the insurer is legally prohibited from paying orare uninsurable at law.

• "Securities Claim" means any written demand for damages or other legal remedy or civil proceeding commenceddirectly or derivatively by a past or present holder of securities of and issued by the company, in that holder'scapacity as a security holder in the company, or a regulatory proceeding commenced by an official body inconnection with the purchase, sale or offer to purchase or sell securities of and issued by the company, whichalleges a wrongful act involving the violation of securities laws.

• "Wrongful Act" means any actual or alleged act or omission, including breach of duty, breach of statutory duty,breach of trust, negligence, error, misstatement, misleading statement, breach of warranty of authority, libel,slander or any other wrongful act or omission committed or attempted by any insured person while acting in hisor her capacity as an insured person on behalf of the company or by the company, but only with respect to asecurities claim. The list of wrongful acts will often be expressed as illustrative only and not exhaustive by using


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the term "including but not limited to". It is usual for a D&O policy to cover claims for wrongful acts that tookplace before the commencement of the policy.

Typical extensions

While D&O policies differ from insurer to insurer, the following are some typical automatic and optional extensionsavailable in standard D&O policy wordings:

• Additional limit of liability for directors or officers. A ring-fenced additional limit of liability on behalf of eachdirector and officer for loss which is not indemnified by the company, subject to a maximum aggregate amount.This extension applies only in excess of the total exhaustion of the limit of liability of the policy and all otherapplicable policies.

• Advancement of costs and expenses. The insurer will advance defence costs and legal representationexpenses incurred by the company or any insured person before the final disposition of a claim or aninvestigation, subject to the company and the insured person repaying such costs and expenses to the insurerif it is later determined that there is no coverage, including by reason of the operation of a conduct exclusion(see Typical exclusions).

• Claim mitigation. Cover for costs incurred by the company to minimise the risk of a claim against the companyor any insured person, provided that notification of the circumstances reasonably expected to give rise to a claimhas been made to the insurer, that such a claim, if made, would result in cover under the policy and that thecosts are reasonably and necessarily incurred for the principal purpose of avoiding a claim. The scope of thisextension and in particular, the requirements to satisfy it, may often be negotiated.

• Continuous cover. Despite a prior known circumstances exclusion (see Typical exclusions), the insurer willpay loss as a result of a claim or investigation first made against the company or an insured person duringthe policy period arising from any fact or matter which an insured person first became aware of prior to thecommencement of the policy period and knew prior to the commencement of the policy period may result inan allegation of wrongdoing against the company or an insured person. This extension is typically subject toconditions that the company has maintained without interruption D&O liability insurance, that the claim and theprior known fact or matter was not notified to the insurer earlier or to any other insurer under an earlier policyand that cover will be pursuant to the terms and conditions of the policy in force at the time the insured personfirst became aware of the prior known fact or matter.

• Crisis expenses. The insurer will pay the reasonable fees, costs, charges and expenses incurred by thecompany, with the insurer's prior written consent, in retaining the services of any public relations firm, crisismanagement firm or executive search firm to advise the company with respect to managing the publiccommunication and limiting the disruption to the company's business due to the announcement of a claim,the disability, death, discharge or resignation of a key director or officer of the company, or a reduction in thecompany's market capitalisation attributable to an unforeseen event. This extension is usually subject to a sub-limit of liability.

• Derivative claims. Cover for the costs of shareholders pursuing a derivative action in the name of the companyagainst any insured person which costs the company is ordered by a court to pay (see Derivative actions).

• Emergency costs and expenses. The insurer will pay defence costs and legal representation expensesincurred by the company or any insured person without the insurer's prior written consent, if such consent cannotbe requested because of an emergency.


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• Employment practices. The insurer will pay any loss which results from a claim for an actual or allegedemployment related wrongful act, including unlawful discrimination, unlawful harassment, bullying and wrongfultermination, where the claim is made against an insured person by an employee of the company or a third party.

• Extended reporting period. If the policy is not renewed by the company or there is a change in its control as aresult of a merger or acquisition, the company will be entitled to an extended reporting period (typically 90 days atno additional premium and 12 or more months at an additional premium) during which the company may give tothe insurer written notice of a claim alleging, or an investigation concerning, a wrongful act occurring before theexpiry of the policy period or the change in control. The length of the extended reporting period may frequentlybe negotiated. The extended reporting period will commence immediately from the expiry of the policy periodor the change in control, as applicable, and terminate immediately on the renewal or replacement of the policy.

• Extradition costs. Cover for the reasonable fees, costs, charges and expenses incurred with the insurer'sprior written consent resulting from an insured person lawfully opposing, challenging, resisting, defending orappealing a formal request, warrant for arrest or other proceedings pursuant to the provisions of the ExtraditionAct 1988 (Cth) or similar legislation in any foreign jurisdiction.

• New subsidiaries. Automatic cover for any entity created or acquired by the company after the commencementof the policy.

• Outside directorships. Cover for any claim against a director or officer of the company on account of his or herposition as a director or officer of an outside company provided that such position is taken with the knowledgeand consent or at the request of the company. This cover applies in excess of any other insurance policy whichprovides coverage to the director or officer and any indemnification available from the outside company to thedirector or officer.

• Pollution. The insurer will pay any loss which results from a claim based on, arising out of or attributable tothe actual, alleged or threatened discharge, release, escape, seepage, migration or disposal of pollutants orgreenhouse gases into or on real or personal property, water or the atmosphere, or any direction or request thatthe company or an insured person test for, monitor, clean up, remove or treat pollutants or greenhouse gases.

• Tax liability. Coverage is extended to a claim against a director or officer alleging that he or she is personalliable for the company's failure to pay taxes and superannuation guarantee charges due from the company (seeTaxation Administration Act 1953 (Cth)). Coverage may also be extended to a claim against a director or officeralleging that he or she is liable to indemnify the Commissioner of Taxation in respect of loss or damage resultingfrom a court order made against the Commissioner of Taxation to reimburse the company for a payment madeto the Commissioner of Taxation by the company under a voidable transaction (see Voidable transactions).

• Workplace health and safety. Despite a bodily injury or property damage exclusion (see Typical exclusions),the insurer will pay the defence costs and legal representation expenses on account of any claim or investigationin connection with an alleged violation or breach of workplace health and safety laws, including any lawconcerning a workplace death or corporate manslaughter.

Typical exclusions

Like policy extensions, exclusions in D&O policies vary from insurer to insurer. Some typical exclusions include:

• Bodily injury or property damage. The insurer will not be liable for any loss in respect of any claim for bodilyinjury or property damage, except that cover will usually be provided for mental anguish or emotional distress


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in connection with any employment claim against a director or officer of the company. Cover for defending proceedings concerning corporate manslaughter and breaches of workplace health and safety legislation may also be provided by an extension clause in the policy (see Typical extensions).

• Conduct. Cover is excluded for loss in respect of any claim based on, arising from or attributable to:

• the company or an insured person having gained any profit or advantage to which he, she or it had orhas no legal entitlement;

• any dishonest or fraudulent act or omission by the company or any insured person; or

• any wilful violation or breach of any law, or any conduct or contravention in respect of which a liability isthe subject of a prohibition in section 199B(1) of the CA 2001.

This exclusion will apply only where the conduct in question has been finally established by court judgment orother final adjudication or by any formal written admission by the insured. The insurer may not refuse to advancedefence costs and expenses by reason only that the insurer considers that such conduct has occurred, untilsuch time as the conduct is finally established. For the purposes of determining the applicability of the exclusion,the conduct of one insured will not be imputed to another insured. It is usual for an insurer to agree to advancedefence costs, subject to a reservation of rights with respect to the possible operation of the conduct exclusion.The terms of the conduct exclusion will generally not be negotiable.

• Contractually assumed liability. The insurer will not be liable for loss in respect of any claim based on, arisingfrom or in consequence of any liability assumed by the company or an insured person under any contract oragreement except liability that would have attached to the company or the insured person in the absence ofsuch contract or agreement.

• Insured vs insured claims. Cover is excluded for any claim brought by, or on behalf of, or at the instigation ofthe company against a director or officer of the company. This exclusion is intended to prevent collusive claimsand abuse of the policy and it typically applies only to claims brought or maintained in the US. The exclusionusually does not apply to claims brought by liquidators of the company, derivative claims and defence costsincurred by the director or officer. Due to market pressure, this exclusion is now rarely used by insurers and it isoften replaced with a narrower consensual claims exclusion which is limited to claims brought by the voluntaryassistance, intervention, solicitation or active participation of an insured.

• Major shareholder and board position. The insurer will not be liable for loss in respect of any claim broughtby any past or present shareholder who had or has direct or indirect ownership of or control over a specifiedpercentage or more of the voting shares of the company or of any subsidiary and a representative individualholding a board position with the company. Like the insured versus insured exclusion, the major shareholderand board position exclusion is also intended to prevent collusive claims and abuse of the policy (see OZMinerals Holdings Pty Ltd v AIG Australia Ltd [2015] VSCA 346). The scope of this exclusion is usually opento negotiations between the insurer and the insured. An insured often seeks to increase the percentage of thevoting shares from typically 10% to a higher percentage.

• Prior known circumstances and claims. Cover is excluded for loss in respect of any claim based on, arisingfrom or attributable to any facts alleged or the same or related wrongful acts alleged in any claim or circumstancethat has been or could or should have been notified to an insurer under a previous policy. It is usual for thisexclusion to be subject to a continuous cover extension (see Typical extensions).


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• Prior and pending litigation. The insurer will not be liable for loss in respect of any claim based on, arising fromor in consequence of any proceedings or investigation commenced prior to or pending at the commencementof the policy.

• Professional services. Cover is excluded for loss in respect of any claim based on, arising out of or attributableto the rendering of, or failure to render, professional services by the company or an insured person to a thirdparty, being a person or entity which is not a party to the policy of insurance and which is not insured under thepolicy. In a typical professional services exclusion clause, the term "professional services" means services ofa professional nature involving the application of skill and judgment by the person who carried out the relevantactivities (see Chubb Insurance Company of Australia Ltd v Robinson [2016] FCAFC 17). A company will requirea separate professional indemnity policy, if it provides professional services to third parties.

Typical conditions

It is important for an insured to pay close attention to the conditions in a D&O insurance policy and in particular,conditions governing the notification and conduct of claims. Usual conditions include:

• Aggregation. All claims arising out of the same wrongful act or series of related wrongful acts will be deemedone claim and such claim will be deemed to be first made on the date the earliest of such claims is first madeagainst any insured.

• Allocation. If a claim includes both covered and uncovered matters or persons, the insurer and the insured willuse commercially reasonable efforts to determine a fair and equitable allocation of the loss covered by the policyand the loss not covered by the policy taking into account the legal and financial exposures and the relativebenefits obtained by the insurer and the insured. A typical allocation clause will provide that if the insurer andthe insured cannot agree on allocation of the loss, a senior counsel will determine the allocation issue. In thealternative, some policies provide that the allocation dispute be determined by arbitration. It is usual for theinsurer to pay the fees of the senior counsel or the costs of the arbitration.

• Assignment. The insurer's prior written consent will be required to assign any rights under the policy.

• Cancellation. The insurer's right to cancel the policy, including for non-payment of the premium, will be governedby the provisions of the ICA. No premium will be returned by the insurer to the policyholder if the insurer hasmade a payment under the policy.

• Confidentiality. The existence and terms of the policy will be confidential as between the insurer and the insuredand will not be disclosed except where required by law or the insurer consents in writing.

• Deductible. The deductible will be borne by the insured and the insurer will be liable only for the amount ofloss that exceeds the deductible applicable to the claim. The deductible is not part of the limit of liability payableby the insurer.

• Goods and Services Tax. The insurer will reduce the amount of any payment for the acquisition of goods orservices it makes to or on behalf of the insured under the policy, by the amount of any input tax credit that theinsured is entitled to under A New Tax System (Goods & Services Tax) Act 1999 (Cth).

• Law and jurisdiction. It is usual for the policy to provide that it is governed by the law of the state or territorywithin the Commonwealth of Australia in which the policy is issued by the insurer and that the insurer and insuredagree to submit to the exclusive jurisdiction of the courts in that state or territory.



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• Limit of liability. The limit of liability payable by the insurer will be its maximum liability to pay loss over andabove any applicable deductible. The limit of liability is often inclusive of defence costs and investigation costs.All sub-limits of liability are part of and not in addition to the limit of liability. The additional limits of liability fordirectors or officers are in addition to the limit of liability.

• Non-disclosure and misrepresentation waiver. The insurer usually agrees to waive any statutory right it hasto reduce its liability to pay loss in respect of a claim if an insured makes a non-fraudulent non-disclosure ornon-fraudulent misrepresentation. In relation to a fraudulent non-disclosure or fraudulent misrepresentation, theinsurer often agrees to waive its statutory right to avoid the policy and also agrees to be entitled only to reduceits liability to pay loss in respect of a claim by an amount equivalent to the financial prejudice it has suffered asa result of the fraudulent non-disclosure or fraudulent misrepresentation.

• Other insurance. An insured must notify the insurer of the existence of any other insurance policy availableto the insured in respect of the same loss covered under the policy. It is usual for a policy to provide that tothe extent permitted by section 45 of the ICA, the policy will apply as excess over any other policy available tothe insured. Where two policies of insurance contain other insurance clauses, neither of which are void undersection 45 of the ICA, the two clauses cancel each other out and the insured is entitled to elect from whichinsurer to claim indemnity (see Lambert Leasing Inc v QBE Insurance (Australia) Ltd [2016] NSWCA 254).

• Severability and non-imputation.The insurer usually agrees that no statement in the proposal form made byany insured or knowledge possessed by any insured will be imputed to any other insured persons for the purposeof determining the availability of cover under the policy. The statements in the proposal form made by and theknowledge possessed by an insured person will be imputed to the company for the sole purpose of determiningthe availability of cover under the policy with respect to claims against such insured person. It is also usualfor the policy to provide that only the statements in the proposal form made by and the knowledge possessedby any chairman, chief executive officer, chief operating officer, chief financial officer, general counsel or chieflegal counsel of the company will be imputed to the company for the purposes of indemnity under the policyin relation to the loss of the company.

• Subrogation. If the insurer makes a payment under the policy, it will be entitled to assume conduct of all rightsof recovery available to an insured and the insured will be required to provide all reasonable assistance to theinsurer in the prosecution of such rights.

• Worldwide territory. Unless prohibited from doing so by law, it is usual for cover under the policy to apply toloss incurred, claims made, investigations commenced and wrongful acts committed anywhere in the world.

Notification and conduct of claims

Notification

The insured will typically be required to give written notice to the insurer of any claim first made against an insuredor an investigation commenced during the policy period or extended reporting period as soon as is reasonablypracticable after the insured first becomes aware of such claim or investigation. Some policies specify a time limitto notify a claim or investigation.

Once a claim has been notified, the insurer will conduct an assessment of the insured's entitlement to coverage.This process will often require the insurer to request the insured to provide further information and documents andto advise the insured of any additional investigation that the insurer intends to carry out to enable it to make adecision on indemnity.



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During the policy period, the insured may also notify any circumstance reasonably expected to give rise to a claim orinvestigation and it is important that the insured provides sufficient particulars to enable the insurer to accept suchnotification. Any later claim arising from the notified circumstances will be considered to have been made during thepolicy period or extended reporting period in which the circumstances were first notified to the insurer.

Conduct of claims

The insurer will usually have no duty to defend any claim made against an insured, but the insurer will often havethe right to assume conduct of the insured's defence and to appoint legal representatives to act for the insured.The insurer will also have the right to be provided with information by the insured, be kept fully informed as to theconduct of the defence of the claim and participate in the insured's defence.

The insured will be required to obtain the insurer's prior written consent to incur any defence costs, admit liability,enter into any settlement agreement or consent to any judgment.

Unless it has denied indemnity to the insured, the insurer will be required to advance defence costs promptly, oftensubject to a reservation of rights with respect to the possible operation of one or more exclusions in the policy. Theinsurer will not settle any claim without the insured's consent. In the event of a dispute regarding whether or not tosettle a claim against an insured, the dispute will usually be referred for a binding determination by a senior counsel.

D&O insurance structure

D&O insurance programs

The size of a typical D&O insurance program varies according to a company's exposure, annual revenue and marketcapitalisation. Limits of D&O insurance cover range from $1 million for small-to-medium sized enterprise (SME)companies to $250 million plus for large ASX listed companies. Larger sized programs with limits over $20 millionare usually too large for one insurer and require a tower of insurance comprising a primary layer insurer plus anumber of excess layer insurers to share the risks. For example, a company could have an insurance tower witha total limit of cover of $100 million, comprising a primary layer insurer which is liable to pay the first $25 millionof losses plus first, second and third excess layer insurers, which are liable to pay the first, second and third $25million of losses in excess of the primary layer, respectively.

Another way for insurers to share the risks is by co-insuring separate layers in the tower of insurance or the wholetower.

Companies with overseas operations will likely require an international insurance program to protect its directorsand officers in multiple jurisdictions. This can be achieved by a global master policy issued in one country that coversworldwide activities or by a combination of standalone local policies.

The cost of D&O insurance

An insurer will require information from a company to enable the insurer to price the risk. Several common riskfactors affect the premium for D&O insurance, including the size of the company plus its claim history, industrysector and the qualifications of the company's senior management.

The amount of the premium will depend on the insurer's assessment of these risk factors and will vary therefore fromcompany to company. By way of example, a SME company with annual revenue of less than $100 million and a limitof cover of $10 million can expect to purchase D&O insurance for less than $10,000 per annum. A listed company


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with annual revenue of more than $500 million and a limit of cover of $100 million can expect to pay upwards of$100,000 per annum for its D&O insurance.

Side A Difference in Conditions (DIC) policy

Prudent directors and officers may also require their company to purchase a separate Side A Difference in Conditions(DIC) policy which sits above a traditional D&O insurance tower. Side A DIC policies provide broader coverage todirectors and officers than the Side A D&O liability cover in a typical D&O policy in two principal ways:

• Providing Excess Side A D&O cover that is triggered once a company's traditional D&O insurance tower isexhausted.

• Providing DIC cover that drops down to fill in gaps in a company's D&O insurance tower when any underlyinginsurer is not liable to indemnify the directors and officers, is unable to indemnify due to insolvency or avoidscoverage.

Side A DIC policies give directors and officers additional personal asset protection if claims are made against themand may assist companies to retain key personnel.

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