Regd Prop: Central Brokerage Services Pty Ltd (ABN: 19 008 801 241)
52 Melville Parade, South Perth WA 6151 PO Box 408, South Perth WA 6951 Ph: (08) 9368-8999 Fx: (08) 9367-5335 Web:
www.centralins.com.au
BROCHURE: DIRECTORS & OFFICERS LIABILITY March 2010 Origins When Public Companies became law the Corporations Act was created to regulate them. This statute of law imposed responsibilities on the Directors and Officers, as the key decision makers, (as if these people were the owners) to ensure some integrity and accountability. These laws expose personal Liability upon such people, that is their personal assets can be taken to compensate loss if they have made a wrongly act error or decision in their Management duties. The companies articles of Association (the documented operating parameters of a company) usual include an Indemnity section for the actions of it’s Directors and Officers, but of course that’s not much value if the company can not afford the loss. D&O policy was then created to provide cover for to these individuals. The policy’s origins started with a 2 separate policies and in recent years that have been merged into one, which comprises 2 parts being:a. Indemnity to the Directors and Officers (where the Company’s articles of Association has no provision for Indemnity) b. Co reimbursement (where the company’s articles of Association has Indemnity) The following is and extract from a Product Brochure from “Pacific Indemnity”
Insurance Protection is essential for all Directors Becoming a company director is often the pinnacle of success after many years of hard work and dedication to the corporate endeavour. You may know the company’s business like the back of your hand. However, with the increased seniority of the position, company directors are held more accountable and responsible now, than ever before in Australia’s corporate history. The principal piece of legislation governing the corporate arena is the Corporations Law. Section 232 of this legislation sets out the duties and liabilities of directors and officers which are to: act honestly in the exercise of their powers and in the discharge of their responsibilities exercise a reasonable degree of care and diligence not make improper use of the information acquired to gain an advantage for themselves or others not make improper use of their position to gain an advantage for themselves or others or to the detriment of the corporation.
What is the level of care and diligence required of you? The degree of care and diligence required by the law can differ markedly from director to director. Factors influencing this degree will depend on the size of the company, the nature of its business, the type of persons constituting its board of directors and like considerations. The courts can also look at particular skills or the educational qualifications of certain directors when deciding whether a given director has met the required level of care and diligence. It has often been said that directors who are honest, competent and avoid a conflict of interest should not be concerned about their personal liability. However, the law in this area can be very complex and constantly changing with breaches of some statutes leading to severe penalties. The Corporations Law Amendment Bill 1996 and support for the business judgement rule are examples of such change.
How long is a piece of red tape? The sheer enormity of legislation produced by government only serves to compound the legal exposure facing directors. At the time of preparing this brochure there were virtually thousands of parliamentary acts with varying degrees of relevance to corporate life, depending on your particular set of circumstances. There are many more changes to these statutes if one considers repeals and amendments. Monitoring the relevance of changes to the law relating to your own corporate endeavour can be a mammoth task in itself.
Today’s increasingly litigious society In addition to codified forms of the law, precedent setting cases are also changing and increasing directors’ liabilities under the common law. Indeed, in today'’ litigious society, legal action is increasingly used as a commercial tactic rather than in the legitimate pursuit of compensation Mere competence, honesty and integrity will not necessarily keep you out of the courts if you are facing a hostile takeover situation or an aggressive competitor using litigation as an impediment to your company’s progress.
Page 2 When your personal assets are exposed to funding legal expenses and potential compensation, it understandably tends to be your immediate priority above protecting the interests of the company. Clearly, you don’t have to be liable for someone to try an action against you! To err is human but to forgive is divine The road to misfortune is often paved with the best of intentions and in professional liability terms, ‘having your neck exposes’ is simply the modern metaphor for having your hard earned personal assets at risk. We live in a cruel, unforgiving world and sometimes things just go wrong! When a claim does arise you can feel comfortable with the protection and strength of Pacific Indemnity’s Directors’ and Officers’ Legal Liability Insurance Policy. With adequate insurance, you will not need to seek the forgiveness of the aggrieved party or risk losing your head in the ensuing conflict.
The value of extensive cover Your next board meeting could be your last without an adequate form of Directors’ and Officers’ Legal Liability insurance in place. With continual changes within the legal environment the potential for a claim to arise can occur at any time. Therefore, it is important to have a policy that will respond to your needs. In addition to providing indemnity to the directors and officers, our policy offers a number of extension, some of which are automatic while others require specific application in the proposal form. Generally the following are Automatically included:Advancement of Defence Costs The policy will meet the costs of legal expenses as they are incurred, subject to Pacific Indemnity’s prior written approval, rather than being deferred until final adjudication has been reached. Extended Reporting Period The policy provides for a 90 day extension, subject to an additional premium, to the period in which to notify the claims arising from a wrongful act committed prior to the expiration of the period of insurance, where Pacific Indemnity has refused to renew the policy. Estates & Legal Representatives Provides indemnity to the estate or legal representatives of a director of officer of the corporation. Insured Vs Insured Cover Provides indemnity for one director or officer against another director or officer with regard to: employment related issues (eg unfair dismissal and discrimination) claims involving regulatory authorities court appointed liquidator, receiver, official manager, administrator, or trustees and the like. Attendance at Official Investigations or Inquiries Provides cover for defence costs incurred by any director or officer where they are legally compelled to attend and which may lead to an allegation of a wrongful act. Occupational Health & Safety Provides cover for defence costs in respect of a claim for breach of occupational health and safety laws. Continuity of Cover Provides indemnity where the director or officer first became aware of a fact, situation or circumstance as described in the policy prior to the period of insurance and the director or officer did not notify the Insurer of such fact, situation or circumstance, during the period of insurance. New Subsidiaries Provides cover for newly created or acquired subsidiaries with assets not exceeding 10% of the assets of the corporation. Subsidiary Run-Off Provides continuing cover for directors and officers of the corporation in respect of their exposure incurred while serving on the boards of past subsidiaries. Preservation of Indemnity Provides indemnity which is usually provided by the corporation if it were to become insolvent. Non profit Outside Directorship Provides cover in respect of non-profit organisations. Outside Directorship Run-Off Provides cover for outgoing directors resigning, either prior to or during the period of insurance. In addition to the above specific extensions, the policy also provides for defence costs in contesting allegations whether criminal or otherwise. That is, the accused is innocent until proven guilty. The Advancement of Defence Costs policy feature will also apply to criminal prosecutions up until the time that guilt is proven. The mere allegation of a charge is insufficient to trigger the Dishonesty exclusion. However, the minute guilt has been established, Pacific Indemnity will
Page 3 not fund any further legal expenses irrespective of whether these expenses were incurred before or after the final adjudication. Optional Extensions Available Subject to Proposal Commercial Outside Directorship Provides indemnity to any director or officer representing the corporation’s interest in any organisation, other than a non profit organisation, held at the time of proposal. Prospectus Cover Provides cover in respect of the issue of a prospectus that may have misled debenture holders or shareholders. Joint Venture Cover Provides cover for the several liability of directors or officers in relation to a joint venture with the corporation. North American Jurisdiction Provides cover in relation to claims brought under the jurisdictions of the United States of America or Canada arising from prospectus liability. Entity Cover Provides cover for the corporation in relation to claims arising from breach of employment practices and related matters. Pre Acquisition Liability Provides retrospective cover for the directors and officers of acquired subsidiaries prior to the time of acquisition. A Flexible Approach In addition to the above policy features we can further enhance the cover by endorsing the policy to meet the changing needs of your clients.
Premium costs The premium is driven by the size of the organization; revenue and staff. Minimum premium 2010 is $1200. Excess on company reimbursement $5,000 and Directors otherwise $250 Note: non profit groups / social clubs min premium $750 Note- Insurers DO NOT QUOTE on such risk without first perusing a completed proposal form together with a company of the entity’s latest financial accounts. DISCLAIMER The material contained in this publication is general comment, it is not intended as advice. No reader should act or fail to act on the basis of material contained herein. This brokerage expressly disclaim all and any liability to any persons whatsoever in respect of anything done or omitted to be done by any such person in reliance whether in whole or in part on any of the conditions of this publication.