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Directors and officers (D&O) of companies may now be more vulnerable to class actions. That’s because legislation to extend the COVID-19 relief measures to corporate obligations beyond 21 March was stalled in the Senate.

So, the pre-pandemic way of doing things are back in force. You can’t hold virtual shareholder meetings or announce them to shareholders electronically nor have clients sign contracts online. Importantly, directors and officers no longer have the defence against civil actions if they didn’t know information should have been disclosed.

Be aware that affected businesses include not just publicly listed companies, but also private and non-profits.

 

The substance of claims

Until the Senate impasse is overcome, it’s handy to know how to manage a D&O liability insurance claim against your company. You may be liable for what happens within the scope of your regular work duties, such as:

  • Alleged or actual negligence or wrongdoing when managing a company, including misrepresentation in your prospectus
  • Defence costs and damages from wrongful action as well as lawsuits
  • Losses due to a company not complying with laws and regulations, such as for workplace health and safety, employment or HR practices, cybersecurity, and privacy
  • Operational failures, plus mismanagement including poor corporate governance (misuse of company funds), the underperformance of the company or stock
  • Stealing intellectual property and poaching customers from your competitors
  • Bankruptcy or financial losses due to a fiduciary duty breach
  • Company decision-making with dire consequences.

As well, even after a director or officer has left your employ, they’ll still be held liable for seven years. That’s why your business should opt for maintaining ‘run-off cover’ as part of your insurance policy. Usually, businesses and organisations take out this cover to protect past, current, and future directors’ personal assets – and that of their spouses – plus the company’s subsidiaries.

Exclusions to D&O insurance include:

  • Purely personal disputes
  • Fraud
  • Property damage and bodily harm, except when someone does as a result of your company’s actions or negligence (corporate manslaughter)
  • Intentional non-compliant acts
  • Legal action in train when the policy started
  • Where the company executives secured funds illegally or for their own profit
  • Claims made under an old policy or which other insurance covers
  • Penalties and fines.

A claim has been lodged – now what?

So, who can make a claim? Shareholders, investors, customers, vendors, creditors, competitors, regulatory and other bodies can sue your business.

Here’s an overview of the process when there’s a fresh claim against your D&O insurance. Usually, your legal and risk teams will inform us, send us details, and the director/officer in question will also be in the loop. We’ll ask you for more information that will help us determine the deductible. Should your policy cover the claim, we’ll organise for an advance to pay for your defence costs, and if the claimant wins, we’ll organise for the losses’ bill to be paid. However, if you don’t have D&O cover, the director/officer claimed against would personally have to pay for the defence costs, and financial loss.

 

Keeping a step ahead of possible claims

Now that you know who can claim, why, and the process, it’s time to fill in one blank – how to manage the risk. You should update us when:

  • Your company’s financial condition or operations change – positively or negatively
  • Someone or an organisation acquires more than 50% control of the company’s issued share capital or the maximum number of votes that could be cast at a board meeting (including the date of the change)
  • Your company’s entity or subsidiary being acquired by another
  • A merger or acquisition is likely to happen
  • Your company will start operating in North America – you’ll need to check with us that you can extend your cover there
  • Your capital structure changes such as from initial public offerings or above threshold capital raisings
  • You appoint an outside director
  • Your company, its directors, or officers are subject to regulatory action, investigation, enquiry or court hearing
  • Your company lists on a foreign exchange or delists from the Australian Stock Exchange.

These are substantial changes to your company, so updating helps us review your coverage. That keeps you on top of your risk profile with the best possible policy. We’ll also guide you on the potential significance of the terms in your D&O policy, which may not always keep pace with business developments and a changing liability landscape.