Directors and Officers Insurance

During the renewal period for FY17 the majority of clients have experienced significant rate increases in their Directors and Officers Liability (D&O) renewal premiums.

Over the last decade the risk that ASX listed companies have faced from the threat of class action litigation has intensified. Both the overall number of claims and the size of settlements have increased year on year. During 2015-2016, there were 35 securities class actions filed and over $400m paid out in settlements, and over the past decade there has been more than $1 billion paid on securities class action settlements.

The most common cause of action against a company or its directors is a breach of the ASX continuous disclosure obligations. This increase in Securities Entities Cover (Side C) exposure has been exacerbated by the downturn in the resources sector and associated company insolvencies.

In a recent presentation, Estelle Pearson of Finity, Australia and New Zealand’s largest independent actuarial and analytical consulting firm, gave an overview of the entire Australian D&O market experience. This report showed that as a whole the Australian D&O market has been running at a gross loss ratio of 100% for over for the past three years and commented that at current pricing they see this trend remaining or increasing.

There are strong indications that the market for Side ABC D&O is set to become even more challenging for insurers. There are new sources of litigation funding and the industry is beginning to fund actions against a broader range of companies.

We have also seen the advent of “open class” actions where an applicant brings a class action on its own behalf and, without consultation, on behalf of all persons who acquired an interest in a company’s shares and may have suffered a loss as a result of a company’s conduct during a particular period.

The 2017 year has already seen an intensifying number of potential securities actions with the following matters being agitated:

Crown Resorts Loss of $630m market value as news was disclosed that Crown employees were detained.

Bellamy’s Australia Loss of $500m market value and potential breach of disclosure obligation relating to significant lowering of revenue projections.

Sirtex Medical Lost 40% of its share price in one day and potential breach of disclosure obligations due to lowering of revenue projections.

Spotless Group Holdings Loss of approximately $1 billion market value and potential breach of disclosure obligations due to lowering of revenue projections.

For these reasons all Insurers are being more selective on AB and Side C risks for renewals and new business, decreasing capacity, increasing their deductibles and increasing the premiums. Whilst each account is looked at on its own merits, we are seeing an average increase in premiums of 200% for ASX listed companies.

In the private company space we are also seeing an increase in claims activity driven not only by shareholder actions but also employee claims such as wrongful dismissal, sexual harassment, failure to promote and discrimination. There has also been an increase in claims brought by regulatory authorities for breaches of OH&S, financial market misconduct and environmental issues. Creditor claims also continue to be on the increase, all of these claims further highlighting the need for D&O Insurance.

Insurance Market Capacity

The D&O market consists of insurers, including the following, who are able to provide capacity at various limits;

  • AIG
  • CGU
  • QBE
  • ALLIANZ
  • Chubb
  • Vero
  • AWAC
  • HDI Gerling
  • XL Caitlin
  • Berkshire Hathaway Speciality
  • Lloyds of London
  • Zurich

Scope of Coverage

COVERAGE CATEGORY   DESCRIPTION   COMMENT
Clause 1A
Directors and Officers Liability Coverage
  Covers losses for Wrongful Acts for which a Director or Officer is NOT indemnified by an Organisation (Insurer reimburses the Director)   Typically applies where the Organisation cannot provide an indemnity either because it is insolvent, or because of the nature of the claim (e.g. loss involves fraud)
         
Clause 1B
Company Reimbursement Coverage
  Covers losses for Wrongful Acts which a Director or Officer IS indemnified by an Organisation (Insurer reimburses the Organisation)   Most D&O claims made under this category. Ideally should have formal Deed of Indemnity in place
         
Clause 1C
Entity Securities Coverage
  Covers Securities Claims for Wrongful Acts based upon or attributable to the purchase or sale or offer or solicitation of an offer to purchase or sell any Securities of the Company.   For public companies only and is the only element of company cover offered under a D&O Policy
         
Clause 1D
Legal Representation Expenses
Directors and Officers
  Covers Legal Representation expenses on account of any Formal Investigation for which a Director or Officer is NOT indemnified by an Organisation (Insurer reimburses the Director)   Clauses similar to 1A and 1B except that they do not provide cover for Wrongful Acts, but rather cover legal fees to assist directors in the case of administrative or regulatory inquiry.
         
Clause 1E
Legal Representation Expenses
Directors and Officers
  Covers Legal Representation expenses on account of any Formal Investigation for which a Director or Officer IS indemnified by an Organisation (Insurer reimburses the Organisation)  

Clauses similar to 1A and 1B except that they do not provide cover for Wrongful Acts, but rather cover legal fees to assist directors in the case of administrative or regulatory inquiry.

Contact our experts now:

Deborah Rodger
P +61 2 9346 8037 M +61 423 688 349
Mark Winwood
P +61 2 9346 8090 M +61 423 461 485