Co-authors of the AICD publication, A Guide to Damp;O Insurance, Colin Smith and Nancy Milne* discuss the implications for directors and companies.
While HIH Insurance is in provisional liquidation, the extent of reported losses and those yet to be disclosed would seem to indicate that the end for an insurance icon is near. The collapse has had a significant affect on numerous community groups including:
• professionals who relied on HIH for their professional indemnity insurance.
• Directors and officers who have relied on HIH for directors and officers liability (D&O) insurance.
The collapse of HIH will impact upon:
• those with insurance policies currently underwritten by HIH,
• those with claims currently being dealt with,
• those with future claims arising from circumstances currently known to them
• and the market for this class of insurance as a whole.
Insurance policies currently with HIH.
Liability imposed upon a director or officer is personal and cannot be avoided because of the failure of insurance protection. In many instances the company will be legally able or obliged to provide indemnity. This could have a negative impact on the company's profit and loss and/or balance sheet.
Prudent directors and companies, with the assistance of their insurance brokers, should have arranged alternative insurance. The new arrangement should provide unlimited retroactive cover for claims made in the future regardless of when the circumstances giving rise to the claim occurred. Such cover will be subject to the directors and company having no prior knowledge of the circumstances. In addition insurance brokers should undertake a detailed analysis of changes to policy terms and conditions provided by the new insurer to highlight any alterations to the protection afforded to directors and officers. A new insurer may impose more limitations on cover. Directors and officers should always ensure that they are aware of changes in cover whenever a proposal to change insurers is considered. There is no standard insurance policy for this class of insurance. Current D&O claims If HIH has been notified of the claim or circumstance they should be kept informed of developments and their acknowledgement should be obtained. This acknowledgement is unlikely to be an admission of liability or any form of direction as to how you should proceed.
The matter will need to be dealt with as if insurance did not exist. We anticipate that a court would expect a client in these circumstances to conduct itself in the same manner as a prudent uninsured. Ultimately the amount claimed for damages and costs will be recoverable from liquidator funds, if any, in conjunction with claims by other unsecured creditors. Some directors, officers and companies may have already experienced complications in relation to claims, which were, until recently, being handled by HIH. In such matters, lawyers previously being instructed by HIH will seek to obtain instructions from insured directors, officers or companies. As mentioned earlier the liabilities are personal. Claimants are, we suspect, unlikely to agree to adjourn matters until liquidator funds, if any, become available. Are lawyers entitled to seek payment of outstanding costs incurred at the instruction of HIH from insured? We do not believe that they are entitled to do so and they too will become unsecured creditors.
Finally, there is one avenue that should be explored in all cases. In some circumstances it may be possible to obtain some indemnity from the HIH reinsurers. This remedy is introduced by Section 562A of the Corporations Law, but will apply only if HIH is placed into liquidation. Future D&O claims arising from previously reported circumstances If circumstances have been notified to HIH but no claim has arisen to date, acknowledgement of the notification of the circumstance should also be obtained to ensure status as a creditor is not prejudiced if a claim arises. Obtaining acknowledgement of developments and circumstances may avoid complications with the liquidator. Insurance policies issued by HIH require that legal costs must not be incurred without the prior written consent of HIH nor are admissions of liability or settlements to be made. In the absence of consent, we believe a court would expect you to act as a "prudent uninsured". If a claim arises it will need to be dealt with in the same manner as for a current claim, as detailed earlier.
Impact on the market for D&O insurance The collapse of a major insurer will inevitably result in a review of underwriting activities and acceptance by other insurers. HIH was experienced in writing D&O insurance for over a decade. It was an insurer that provided some cover which others refused or at a cost with which others would not compete. It is unlikely the role of HIH in the D&O insurance market will be quickly replaced. Its collapse comes at a time when the market is rationalising and apart from the obvious reduction in available capacity, it is also likely to cause other insurers to review underwriting guidelines. The scope and availability of cover will reduce and premiums will increase. Many insureds have, in obtaining alternative cover, experienced the imposition of restrictions to cover and dramatic (up to 100 percent) increases in cost. Others have failed to obtain alternative cover. Apart from not being able to recover claim losses there is little likelihood of any return of unused premium from a liquidator in these circumstances. If you were insured with HIH at any time, you should check that the following action has been taken. If, due to market conditions it is recommended that you change D&O insurers, you should ensure that you have carefully examined the issues listed in the table . The ramifications of the collapse of HIH on D&O insurance will be significant and felt for many years to come. It has never been more important for directors and officers to obtain a presentation from their advisers/lawyers/brokers as in this class of insurance, there are many traps for the unwary!
* Colin Smith is a consultant insurance and risk manager for Clayton Utz and principal consultant of strategic insurance and risk solutions. He can be contacted on (03) 9821 5490 or email@example.com Nancy Milne, a partner of Clayton Utz, can be contacted on (02) 9353 4111 or firstname.lastname@example.org
ISSUE Action Current HIH policyArrange alternative cover ConstitutionReview the company constitution to determine the extent of your entitlement to indemnity from the company. Current claimsObtain formal acknowledgement of the claim from HIH/Liquidator. Act as a "prudent uninsured" in the absence of any advice to the contrary. Ensure that the insurer is kept informed of developments and obtain agreement to proposed costs and settlements from them. ReinsuranceHIH may have placed reinsurance in relation to your claim/circumstance. Contact the provisional liquidator to obtain details. D&O insurance market post HIHA "sellers market" will prevail. Plan ahead for your D&O insurance needs and seek the advice of legal and independent advisers. Budget for premium increases. Scope of coverEnsure that your insurance broker has detailed any changes in the scope of cover that will be provided in the proposed cover. This is particularly important in respect of limitations in the cover. Retroactive protectionEnsure that the new cover will provide unlimited retroactive protection for claims arising from circumstances not known to you. Known circumstancesEnsure that all circumstances from which a claim could arise are notified to the current Insurer before cover expires. Ensure that formal acknowledgement is received from the insurer.
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