Regular D&O insurance review needed

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In the wake of two recent high-profile court decisions, risk managers and company directors have been urged to review their directors and officers insurance provisions.

The call comes as company directors weigh up the implications of the ruling against Centro Properties Group’s directors, as well as the recent Bridgecorp ruling in New Zealand.

In the Centro case, brought by ASIC, the CEO and CFO of Centro Properties Group were judged to have failed to exercise due care and diligence by failing to detect major errors in Centro’s financial statements. Centro’s former CEO, Andrew Scott, was ordered to pay a fine of $30,000, and the company’s former CFO, Romano Nenna, was given a two-year management disqualification.

It’s the Bridgecorp ruling, however, that has been held up as a game changer when it comes to the risks faced by directors who fail to secure adequate D&O liability coverage.

In this this instance, the former directors of the collapsed Bridgecorp group exhausted their $2 million directors’ statutory liability coverage in defending themselves against criminal proceedings brought by New Zealand’s corporate regulator. They were prevented, however, from accessing the company’s $20 million D&O policy to pay for ongoing defence costs after Bridgecorp’s receivers invoked 75-year old legislation to lay claim on the money as part of intended civil proceedings against the group.

Pending an appeal, the ruling means that Bridgecorp’s former directors may have to fund the remainder of their defence costs out of their own pockets – putting them at risk of facing financial ruin.

This ruling should be of concern to Australian directors and risk managers, says Navigators international head of D&O Steve Pearsall, because the similarities between New Zealand and Australian legislation mean that a similar ruling could be made against the directors of Australian companies who find themselves in court.

“It’s a New Zealand decision, but there’s very similar legislation in Australia,” he said. “This is quite an old act, dated back to the 1930s, so it’s something that was slightly buried. But in this case they’ve accessed this act and it’s raised awareness that this can happen now. We’ve sought outside counsel, and I think it’s raised a lot of eyebrows in Australia and New Zealand. I think it could well be the case that we see more of this going forward.”

The act in question is New Zealand’s Law Reform Act 1936, a provision of which was invoked by Bridgecorp’s receivers to lay claim to the group's $20 million D&O insurance fund. Research from Cooper Grace Ward reveals that there is similar legislation in place in three of Australia’s states and territories.

According the law firm, the NSW Law Reform (Miscellaneous Provisions) Act 1946 was modelled on New Zeland legislation, and contains a similar provision to the one invoked by Bridgecorp’s receivers, while there is equivalent legislation in NT and ACT.

Pearsall adds that, according to his counsel, Australian cases have already been earmarked by observers in which the plaintiffs may invoke such legislation to prevent directors from accessing D&O liability insurance funds.

What to do

So how can directors protect themselves against the risk that such a ruling will leave them with a million dollar legal bill? Navigators head of international management liability Carl Bach suggests undertaking a full review of D&O liability coverage.

“The first step I would take as a director is to ask my risk manager or CEO what type of policy and structure they have in place, and maybe to even buy D&O coverage. And at that stage I think a full review of the terms and conditions of the policy – in the light of Bridgecorp and Centro – would be wise. Consulting a knowledgeable local insurance broker would be the best way to go about that,” he said.

Actions to take may include:

Topping up the company’s existing D&O structure;
buying more of what Bach calls the ‘traditional ABC’ form of D&O coverage, or
topping up ‘side A’ of the policy, which covers directors for non-indemnifiable claims brought against them.

He’s also quick to flag up the new insurance products that have come onto the market to cover directors against Bridgecorp-type rulings – including his own offering, NavDefence.

“Maybe it’s just a case of topping up existing coverage, or maybe it’s exploring a new product like NavDefence. But I think they’re inexpensive enough to provide options to companies and their risk managers,” he said.

“The market for D&O insurance is extremely competitive at the moment. It is in a sense a buyer’s market. So in light of all these things going on, there are several products out there to mitigate these exposures and transfer risk of some of these exposures – and they’re available at relatively inexpensive premiums.”

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