Director’s & Officers’ Liability Insurance

All Directors and officers can be personally liable for claims made against them for any actual or alleged mismanagement of the company. This is the case whether the company is private or public. Reported by JIM MALADY of Australian Reliance Pty Ltd.

IT is true that one of the most common sources of claims is from shareholders, which is why directors and officers of private companies feel less exposed to claims. There are however several other sources of a claim against a private company:

• New Directors (following change in ownership)
• Creditors
• Liquidators
• Employees
• Regulatory Bodies, in particular Investigations e.g. ASIC Investigation
• Client/customers
• Competitors

In general terms directors and officers may be sued for matters such as:

• Breach of general duty to act honestly, with reasonable care and due diligence
• Breach of fiduciary duty
• Breach of contract
• Breach of statutory duty e.g. EPA and Workcover

Specifically directors and officers may be sued for matters such as:

• Incorrect or misleading statements
• Failure to comply with Continuous Disclosure rules
• Conflicts of interest
• Restrictive trade practices
• Incurring debts with the knowledge that the company is not in a position to repay
• Employment-related actions (wrongful dismissal, discrimination, sexual harassment)

Whilst the likelihood of claim is low, the severity (not to mention the time cost) can be high, especially for a private company. Accordingly, there are a range of cost effective insurance solutions available to protect the directors and officers of private companies.

Here are some real claims examples:

CLAIM 1: Occupational Health and Safety

Insured: Insured is a Pty Ltd Company with 20 employees and annual revenue of $6.3 million

Scenario: During the construction of a commercial property, an employee was severely injured and left paraplegic when a pile of debris accidentally fell on him. The company was subject to a full Occupational Health and Safety investigation and prosecution.

Outcome: The Company vigorously denied and successfully defended all allegations. Despite their attempt, the Company was fined $150,000 and incurred $100,000 in legal costs.

CLAIM 2: Employment Practices Liability – Harassment and Bullying

Insured: Insured is a Pty Ltd Company with 20 employees and annual
revenue of $20 million

Scenario: Claims by two former officers of the company against certain directors and officers for bullying, harassment, abuse and sexual harassment against a former employee. Claims against the entity that it failed to respond to those allegations. Employees claim combined compensation of $500,000.

Outcome: Matter settled for payment by the company $200,000 per Claimant. In addition, the company paid $120,000 in defence costs.

CLAIM 3: EPA Prosecution

Insured: Insured is a Pty Ltd Company with 20 employees and annual revenue of $5 million

Scenario: The director and company were charged with three offences under the Environment Protection Act. These are indictable offences and each charge carries a potential maximum fine of $280,000.

It was alleged that the driver, employed by the company, drove a petrol tanker (owned by the company) to a petrol station. When maneuvering the tanker to the unloading tanks, the driver collided with a fuel pipe, causing over 3000 litres of petrol to escape from the tanker and on to the ground of the petrol station.

Outcome: Following a three day hearing, the director and company were found liable and were fined $120,000. Overall defence costs of $60,000 were incurred over the duration of the investigation and prosecution.

In the next edition of Sand & Stone we will provide you with some specific information in regard to the four key items of cover that are essential to ensuring the effectiveness of your Directors & Officers Liability policy.

For further information contact Jim Malady 0418 334 685.

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