Ten questions every company should ask about their D&O insurance

1 What is an appropriate limit of D&O cover?

The level of D&O cover your company requires will depend on a variety of factors, including: the ownership structure of the company (whether it is publicly listed or a private company); the size and complexity of the corporate group; the number of directors and officers you are looking to cover under the policy; and the location of your business operations.

2 Does the D&O policy include cover for shareholder class actions?

For publicly listed companies, a D&O policy may be endorsed to include cover for the company for loss resulting from a securities claim brought by shareholders (Side C cover). If Side C cover is part of the aggregate limit under the policy, then it may be prudent for directors and officers to obtain additional cover for non-indemnifiable loss.

3 What is the period of cover under the D&O policy?

The standard period of cover for a D&O policy in the Australian market is 12 months. A D&O policy will typically provide cover for claims made and notified during the policy period. Some policies provide cover for an extended discovery period.

4 Who is covered as an “Insured Person” under the D&O policy?

A list of persons covered by the D&O policy will usually be set out in the definition of “Insured Person”. You should ensure that all persons intended to be covered by your policy are captured by the definition. Policies typically cover directors and officers, shadow directors and employees of the company involved in senior management.

Policies may also include cover for a range of other persons such as retired directors and officers, prospective directors and persons serving on management committees.

5 What “Claims” are covered under the D&O policy?

“Claims” covered under D&O policies will generally include any written demand, civil proceeding, criminal proceeding and formal administrative or regulatory proceeding, and appeals from such proceedings. Usually, the claim must allege a wrongful act committed by the director or of cer, acting in that capacity. Companies in certain industries may want to consider including cover for regulatory investigations (which may not always result in formal proceedings but which can be very expensive nonetheless).

6 What “Loss” is covered by a D&O policy?

The D&O policy will insure a director or officer for various specific types of loss. Cover for reasonable legal costs associated with defending a claim is usually included but such costs may not always be advanced immediately. Some D&O policies are tailored to include cover for additional expenses such as public relations expenses, bail bond expenses and reputation protection expenses. Sub-limits often apply to these categories of expenses.

Generally, a D&O policy will not include cover for criminal fines or penalties, taxes government duties, any multiplied portion damages awarded or uninsurable matters.

7 What are the “Exclusions” under the D&O policy?

It is very important to understand the exclusions that apply to your D&O policy and to ensure that the type of claims that may arise in respect of your business will be covered.

Standard exclusions include claims arising from an act, omission or dispute which occurred prior to the policy period which a director or officer knew, or ought reasonably to know was likely to give rise to a claim. Claims arising from deliberate acts of fraud or dishonesty are also commonly excluded.

8 How does the D&O policy apply to each director and officer? 

It is critical to understand how the policy works in respect of each individual director and officer.

For example, if one director fails to disclose information which is relevant to the insurer deciding whether or not to issue the policy, will this result in cover being reduced or even denied for all Insured Persons? A number of D&O policies include “severability and non-imputation” clauses that ensure innocent directors and officers still have the benefit of the policy in such circumstances.

9 Do we need any specific extensions to our D&O Policy?

You should carefully consider the potential risks your organisation and board face and discuss the type of tailored D&O policy you may require. Various extensions are available to cover specific types of liability such as prospectus liability, tax liability and breaches of privacy. You may also look for an extension to cover regulatory risks particular to your industry, such as occupational health and safety investigations.

10 Do we need a standalone defence costs policy?

In certain Australian states, third parties may assert a statutory charge over insurance monies.

At present, an insurer is not prevented from paying defence costs to a director or officer as a result of a statutory charge. But this issue has been decided differently in New Zealand and is yet to be considered by the High Court of Australia. A supplementary defence costs policy may prove to be a worthwhile addition to your D&O program and will also provide additional cover for legal costs incurred by directors and officers in the event that the D&O cover is exhausted as a result of a large liability.