Fast paced, competitive and aggressive, boxing is a natural metaphor for doing business. Every company’s management team works to design sales pitches, stellar products or strategies that will deal a knock-out blow to their competitors. In a constantly changing environment, directors make decisions in the best interests of the corporation on the basis of available information. Despite having the business’ best interests in mind, hindsight is twenty/twenty, and it’s impossible for a director to always make the right decision or the best possible decision when the vast majority of factors are outside the corporation’s control.
D&O policies cover directors and the corporations they control. It’s something worth considering if a business operates in an industry which is highly regulated, is undergoing major change or if the organisation operates in many countries. D&O policies can be an essential protection for directors as well as having a well-drafted shareholders agreement in place to outline the roles and responsibilities of directors.
What is D&O?
D&O policies cover directors and their related organisations, to protect them from any claims or actions which might arise from the actions of the directors, taken within the scope of their duties. Policies can cover the personal liability of company officeholders and can also cover a company if the company pays the claim of a third party on behalf of its directors.
In a nutshell, managers make mistakes and can be personally liable. Directors walk a fine line, making complex and tough decisions based on limited information when the stakes can be extremely high (think of merger and acquisition situations). D&O policies cover directors when they make these tough decisions, and they are acting within the scope of their duties.
What Duties do Directors Have?
Becoming a director of an organisation should not be taken lightly. Directors are tasked with guiding the organisation through tough deals and business decisions and their duties are laid in stone in the Corporations Act 2001 (Cth) (the Act). Part 2D.1 of the Act sets out the powers and duties of company officeholders. For example, officeholders must exercise their powers and discharge their duties in good faith and in the best interests of the corporation and for a proper purpose (section 181). An officeholder must not use their position to gain an advantage for themselves or someone else, or cause detriment to the corporation.
What is the Scope of D&O Insurance?
Depending on the company and the context, D&O coverage should be considered as one part of the suite of protections for companies, including having a well-drafted shareholders agreement and other legal documents to structure the company’s relationships with its employees and to exploit its intellectual property.
D&O policies cover directors who have made decisions within the scope of their duties. D&O policies do not cover decisions which have been made fraudulently, criminally or are intentionally non-compliant acts. D&O policies do not provide coverage for situations where directors have obtained illegal remuneration, or acted for personal profit (in breach of their Part 2D.1 duties).
In addition, a D&O policy will usually cover all past and present directors, as claims may arise after a director has exited the company.
Directors make thousands of decisions in the course of running a business. Often, decisions need to be made in a short time frame and with limited information. Directors have obligations to act in the best interests of the company under the Corporations Act and even though a director may do this, it’s impossible to always make the right decision.
D&O policies should be considered for the protection of company directors, as well as for the company itself. Speak to your trusted insurance broker for D&O policy questions and if you have any questions about the obligations of directors under the Corporations Act, seek legal advice.
Questions? Let our commercial team know on 1300 544 755.