If there’s one constant in D&O insurance cover, it is change, with directors’ needs increasing and competition ramping up.

    In 2018, the big news in Directors and Officers (D&O) insurance was soaring premiums. Successive years of underpriced capacity and rising claims activity had triggered a “hard market” phase that was to last for four years. Today, higher rates are attracting new carriers, increasing competition and driving down costs — at least for the time being. Insurers may need to increase premiums to offset increases in the cost of defending a claim and any compensation caused by global inflation.

    “During the hard market, boards reviewed their buying habits with regard to D&O insurance and many changed their program structure,” says Theresa Lewin, national head of professional and financial risks at insurance broker Gallagher. “Given the challenging economic conditions, we continue to advise boards to reassess their limits of indemnity and program structure to suit the current environment.”

    In simpler times, cost was often a board’s prime concern. Today, directors must also face the challenge of navigating cover in an increasingly complex environment.

    “Breaches of continuous disclosure requirements, ASX-listing rules and the Corporations Act 2001 are the biggest D&O risks,” says John Muir GAICD, client director, professional and financial risks at Lockton. “Regulations relating to ESG, financial disclosure and civil penalty provisions are all evolving rapidly. There are also emerging exposures such as cyber risks and artificial intelligence, geopolitical and sovereign risk, and changing stakeholder expectations.”

    Lewin believes directors should see the outcome of the recent BlueScope Steel hearing, ACCC v BlueScope Steel Limited (No 6) [2023] FCA 1029, as a reminder of what D&O insurance might not be able to do (see Company Director, May 2024).

    “Justice Michael O’Bryan’s decision to prohibit BlueScope Steel’s former general manager, Jason Ellis, from recovering a $575,000 penalty from his insurance company is an example of current regulator and judicial sentiment toward ensuring corporate and individual accountability,” she says. “Directors can’t anticipate what a court decision may be and it’s imperative they don’t assume these kinds of penalties are insurable under the D&O.”

    Changes in class actions

    Muir believes ESG changes will have a major impact on risk. “We’re moving from a period of voluntary reporting around climate change to mandatory climate change reporting and financial disclosure,” he says. “Large entities must include climate- related disclosures in their annual reports from the start of 2025, with smaller entities to follow. The number of class actions could also be influenced by the fact that this is an area of great interest to many stakeholders.”

    Lewin also sees the continued regulatory focus on greenwashing and bluewashing, disclosure of net zero targets, and the proposed introduction of mandatory modern slavery reporting, as likely catalysts of class action.

    “There’s also growth in employee claims or class actions for underpayments and poor working conditions, including actions brought against organisations and their directors,” she says.

    However, a number of recent class actions were successfully defended, including CBA, Insignia and, on appeal, Worley. “This might indicate they’re becoming more difficult for plaintiffs to prove,” says Lewin.

    Mandy Tsang, a partner at King & Wood Mallesons, wonders whether this will affect the way D&O insurers view the risk. “It could continue to soften the market in terms of securities class action, but it would probably take a few years for any premium change to come through,” she says.

    She points out that the nature of securities class action also appears to be changing.

    “It used to be that you failed to disclose a particular event, litigation or risk, but recent class actions against Star, CBA and now Medibank seem to focus on alleged failure to disclose non-financial risks, an inadequacy in a process or system,” she says. “There are additional complexities in these cases compared with financial disclosure cases.”

    Technology, AI and emerging risks

    King & Wood Mallesons produces an annual Directions report, which identifies areas of concern for directors. Last year, the report explored attitudes to generative AI. Fifty per cent of the survey respondents saw it as both an opportunity and a threat.

    “This in part reflected that many organisations were still at an early stage in assessing how it could be useful alongside other technology and systems,” says Tsang. “Directors were concerned that uncertainties around its use could create new liabilities.”

    Simon Levy GAICD, CEO and company secretary of the Risk Management Institute of Australasia (RMIA) points out that insurers’ risk management services often include cybersecurity assessments, AI ethics and compliance consultations, and best practice guidelines for implementing and managing AI technologies.

    “Many insurers are developing specialised policies to address emerging technologies and AI risks, with coverage for specific risks such as data breaches, cyberattacks and AI-related errors or malfunctions,” he says.

    “We’re also seeing expanded offerings specifically related to AI, such as cover for algorithmic errors, data corruption and AI-driven cyberattacks. Insurers are continuously monitoring the AI landscape to ensure they stay responsive to the rapidly evolving technological environment and emerging threats.”

    Tricky terrain for directors

    The AICD Director Tool on D&O insurance, authored by Herbert Smith Freehills, provides invaluable guidance for directors to thoroughly review their D&O insurance policies. They should clarify the scope of a “wrongful act” and determine whether “claims” are limited to formal written demands. Broad definitions are advantageous as they enable earlier coverage for legal costs. It’s also crucial to verify if coverage extends to regulatory investigations, inquests and commissions, and what level of formality is needed to trigger this coverage. Understanding the process for advancing legal costs is essential, as are insurer-imposed limitations or requirements for consent to incur costs. Directors should also be aware of any pre- approved legal panels mandated by the insurer.

    Sally Leake GAICD, non executive director of Rowing Australia, says that as part of your standard due diligence, when considering a board in any sector, you should understand whether or not D&O insurance is provided by the organisation.

    “Ask for the full policy and read it — don’t be satisfied with a summary,” she cautions. “It’s very acceptable to annoy the company secretary regarding the detail. You must be convinced the coverage for decisions taken during your time on the board extends well beyond your tenure. Clarity from the insurer should be sought if the wording is not explicit. Ensure that this will be a standard inclusion when policies are renewed.”

    Leake also advises directors that while brevity is important, never to forget the old adage, “if it’s not in the minutes, it didn’t happen”.

    “Is there an appropriate degree of intellectual curiosity at the table and are key questions and related outcomes being documented?” she asks. “Obviously, this also becomes very important should the organisation be exposed to litigation at any stage.”

    Finding the right cover

    Gallagher reports some insurers are willing to reinstate coverage enhancements removed or diluted during the hard market. This opens up opportunities to negotiate a lower cost. “You can also explore multi-year policies, which provide price stability and lower premiums over the policy term, offering protection against future market fluctuations,” says Levy. “Once you’ve identified a policy that can be tailored to your needs, you may be able to negotiate better terms by bundling your D&O with other corporate insurance policies.”

    At the same time, evolving risks are leading some insurers to rethink their restrictions. “We’re seeing exclusions based on geography and insolvency, and limitations on cover for capital raising,” says Muir. “Some insurers only provide a minimum level of cover for M&A activities.”

    He recommends engaging with an insurance broker and a risk adviser four months before renewal to discuss strategy (noting policies are generally written on an annual basis). “That includes looking at the risk management framework, your own enterprise risks and what risks you need to transfer,” he says.

    Levy suggests working with your broker to develop an insurable risk profile and complete a stress test. “This will test your policy and its wording in likely scenarios, clarifying how the policy will respond,” he says.

    Tsang advises directors to ensure their D&O, professional indemnity and cyber policies are working together to minimise gaps. “You should also be clear about what happens at the time of the claim,” she says. “Can you choose your advisers, and do you have the right to enter into a settlement agreement? The middle of a crisis is not a good time to start asking what you can and can’t do.”

    “Boards must continue to educate themselves on the evolving risk landscape and evaluate how these developments may have a risk impact on their business,” says Lewin. “Once risks have been identified, prioritising compliance and risk management solutions is key to reducing personal liability for directors.”

    This article first appeared under the headline 'Taking Cover’ in the July 2024 issue of Company Director magazine.

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