Directors may see parallels with madness in today’s indemnity insurance confusion, writes Ali Cromie.
Obtaining directors liability insurance is very much, "pot luck", insurance law specialist, Nancy Milne says, because insurers are backing off covering many industry sectors. Some policies have so many flaws they aren't worth the paper they are written on, Milne told company directors at a recent briefing on directors & officers (D&O) insurance convened by the AICD in Sydney. Milne is a partner at legal firm Clayton Utz.
AICD chief executive officer, John Hall, says members report difficulty in obtaining D&O insurance in industry sectors including; biotechnology, financial services, informational technology, research & development and in new-start companies. Individuals who hold more than five directorships are also struggling to obtain D&O cover. A recent AICD survey showed almost half of company directors were dissatisfied with directors insurance.
D&O broker Andre Louw says the most important reason for buying directors insurance is to protect directors in the event of financial insolvency of their charge. Louw is managing partner of financial and professional services at insurance broker, Jardine Lloyd Thompson Australia. However with numerous cases where indemnity insurance has not lived up to director expectations, not surprisingly Hall says great uncertainty is besetting "director land" about indemnity insurance. He says the Federal Government also wants to know whether exposure to personal liability is acting as a disincentive to directors to engage in entrepreneurial risk. The Government recently convened an inquiry to review the Insurance Contracts Act 1984, the review panel given carte blanche to assess the operations, impact and judicial interpretation of the legislation.
Alan Cameron, former head at ASIC, will chair the inquiry with Clayton Utz insurance law specialist Nancy Milne the other review panel member Senator Helen Coonan, Minister for Revenue and Assistant Treasurer, says that insurers contend that "judicial interpretation" of section 54 of the Insurance Contracts Act presents an obstacle to more insurers entering the Australian market for indemnity insurance. Lack of competition is in turn blamed for adding to the cost and reducing the availability of professional indemnity insurance. The minister has directed Cameron and Milne to examine in the first instance the problematic section 54. A preliminary report on this is due by October 31. Coonan's increasing stature means she's well placed to push through any recommendations for urgent action put forward by Cameron and Milne in their October report.
At the AICD briefing on D&O insurance, directors gained an insight into a possible approach by Milne to the Insurance Contracts Act review. (Her appointment was announced subsequent to her government appointment). Milne flagged her deep concern with the cover provided by directors insurance following the precedent from the cases concerning finance director, Mark Silbermann, the former One-Tel finance director. Silbermann's insurer had refused to pay his legal expenses when he faced hefty fees to defend his role in the failed telecommunications company two year ago. CGU Insurance by evoking the so-called "dishonesty exclusion" at the outset of Silbermann's legal battles left Silbermann swinging to meet his legal defence until exonerated, or otherwise.
Two of three judges supported the CGU interpretation when the case was taken to the NSW Court of Appeal. (Professor Bob Baxt, partner at Allens Arthur Robinson wrote of the implications of the Silbermann v CGU judgement in the August Law Reporter, noting an appeal to the High Court of Australia "is awaited").
Milne says: "Most people thought the (dishonesty exclusion) clause meant that insurance should advance defence costs until there had been a judgement establishing dishonesty." She sees the judgment, if it stands, thoroughly "undermining" the value of D&O policies.
Milne advises directors seeking directors insurance to:
• ensure they can pinpoint the scope of the cover they are considering;
• examine the claims history their prospective insurer;
• make sure that they can "eyeball" their insurer;
• ensure they are in a jurisdiction where you can "sue them" if they fail to meet contract obligations
"I sometimes wonder whether there is a worse time to be a director," muses Clayton Utz partner Stuart Clark, summing up the AICD briefing on D&O insurance. The chilling headline – "Ex-GIO directors up for $20 million" – was "an indication of things to come," Clark predicted.
Nancy Milne and Alan Cameron will have the opportunity to recommend wholesale changes to the Insurance Contracts Act, 1984, as part of their broad brief to recommend amendments to 20-year-old legislation. Their full report is due May next year.
Perhaps a lamplight in "Darkness Visible", to borrow from William Styron's celebrated memoir. After crippling depression, Styron eventually recovered from what he describes as his madness. Directors can no doubt see parallels with madness in the current indemnity insurance imbroglio.
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