If you are a company director, you need directors insurance (also known as directors and officers insurance). Directors usually do not need to pay the debts of the company — the company structure keeps directors’ and company assets separate. However, even if you act in good faith, you might still be fined if the Australian Securities and Investment Commission (ASIC) investigates the company. You might also be sued by a shareholder, employee, client, supplier or creditor. Directors insurance protects you by allowing you to claim certain personal liabilities incurred while acting as a company director. This article explains how directors insurance works and how to check that your policy is sound.
Two Ways to Manage Your Risk
Directors can manage their personal liability risk in two ways:
- a deed of access and indemnity; and
- directors insurance.
A Deed of Access and Indemnity
A deed of access and indemnity is a contract between the company and you as director. This deed usually states that the company promises you:
- access to company records;
- payment of legal costs that arise from being a director; and
- directors insurance.
Importantly, the deed of access and indemnity should last for at least seven years after you resign from being a director. You can be sued for up to six years after the issue giving rise to a lawsuit occurred, even if you have left office.
Directors insurance covers the company for costs that it incurs when indemnifying the director under a deed of access and indemnity. For example, while the deed will state that the company will pay the directors’ legal costs, directors insurance will allow the company to make an insurance claim for those expenses.
Directors insurance also covers the director personally, where the liability is not covered by the deed of access and indemnity.
Key Issues to Check in the Directors Insurance Policy
Before you check your policy, you want to ensure that you have a copy of the actual insurance policy, not just a summary. Key issues to consider when you review the insurance policy are:
Is My Role Actually Covered?
The policy should cover all current and former directors (for seven years after they are a director), the company secretary and other executive officers. It is better for the policy to state roles, not specific people, to ensure that any new person in the role is covered by the insurance.
What is the Insurance Period?
Directors insurance usually runs year-to-year. It may be prudent to have it start and end with the calendar year. This gives you time to consider appropriate cover each year, rather than being caught up in the end of financial year rush.
How Long Does the Cover Last?
A former director can still be sued for up to six years after they resign. Therefore, it is important that the insurance continues after you leave office. Best practice is that it continues for at least seven years afterwards.
How Reputable is the Insurer?
The company needs to choose a reputable insurer that will stand behind the insurance for years into the future. When choosing a policy, consider the track record of the company, not just the premium price.
What Are My Duties and Obligations?
Insurance policies usually include a duty of disclosure. This means that you must disclose any matter that is relevant to the insurer on whether they should insure you and the company. This duty continues for the life of the insurance policy, including when the company renews the policy. If you do not disclose key information, the insurer may reduce the insurance payment, refuse to pay or cancel the policy.
Does Each Director and Officer Have a Separate Contract?
Each director and officer should have a separate insurance contract. You want to ensure that if another director fails to disclose key information, this does not affect your rights if you are innocent.
Is the Cover Broad Enough?
Check carefully to understand what the insurance covers and that it is broad enough. For example, does the policy cover:
- employment law issues;
- liability from share issues and sales;
- legal costs and liabilities as they are incurred, not just reimbursed afterwards; and
- industry-relevant issues such as environmental compliance or health and safety?
Is the Maximum Limit Appropriate to the Company Size?
The insurance policy will have a limit on the total amount of the indemnity, which is the maximum amount that will be paid. You and the company need to consider whether this limit is appropriate. Larger companies can attract bigger liabilities, so you will also need to increase the limit as the company grows.
Does the Policy Allow You to Run a Legal Defence?
Does the policy state that the company can run or take over any lawsuit against you? You will want to negotiate into the deed that the company’s right to control the case is subject to considering your reputation. For example, if the lawsuit will potentially affect your future career, you will want input into how it is handled. You will also want the power to:
- consent to (or reject) any settlements; and
- hire your own lawyer if there is a conflict of interest between your interests and the interests of the company.
Conducting an Annual Review of the Policy
You will need to review the policy and pay the premium annually. This is an opportunity to consider whether both the insurer and the policy still suit your needs. Your company may seek competitive quotes. However, it is important to consider the policy scope, as well as the insurer’s reputation, not just the premium. The company’s insurance broker is in a good position to present to the board on this.
During the annual review, the board should ask each director to confirm in writing whether they know of any circumstance that may give rise to a claim. The directors should also be required to notify the company in future of any circumstances that may give rise to a claim.
Even though a company generally protects directors from personal liability, they can still become liable in certain instances. For example, if fined by ASIC or sued by a creditor. Directors insurance helps protect against this risk, though the level of protection will depend on the scope of the policy. Therefore, you should review your policy carefully, including every year when the premium is due.
If you need your directors insurance policy reviewed, call LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.
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