Directors and Officers Liability Insurance – Part 2

Following his article in the Oct/Nov edition of Sand & Stone, JIM MALADY from Australian Reliance Insurance Brokers outlines crucial items of coverage that will ensure the adequacy of your Directors & Officers Liability policy.

DIRECTORS & Officers Liability Insurance (D&O) can be complicated, especially when no two policies are the same.

There are, however, some crucial coverage features that you must ensure your policy contains:

1. ADVANCEMENT OF DEFENCE COSTS
   Director’s liability is a personal liability. This means that in the event of a claim a director will be personally liable for all costs (which can run into millions of dollars), unless someone pays these costs on their behalf. It is vital to ensure that your D&O policy has strong language around advancement of defence costs. Your Insurance Company must pay the money upfront, as opposed to you having to find the money to pay, and then seeking reimbursement.
2. FINAL ADJUDICATION LANGUAGE
   No D&O policy wants to cover a director or officer where they have committed a fraudulent or dishonest act. Therefore every policy will specifically exclude acts of this type.
   In the event that there is an allegation of fraud and dishonesty and you consider the allegation to be false, you will at least want your day in court. If your policy does not contain ‘final adjudication’ language then the ‘fraud & dishonesty’ exclusion could be immediately triggered based on the allegation alone, which means you get no cover until finally proven innocent.
   A D&O policy with appropriate ‘final adjudication’ language will cover you (and all costs) at least up until the point where you are proven to have committed fraud or been dishonest.
3. SEVERABILITY
   This is often overlooked in D&O policies but vitally important. This is the clause that basically states that the knowledge and acts of other Insured parties do not prejudice your ability to claim under the policy. For example, if one of your fellow directors has been found to be guilty of fraud, you would not want the D&O policy to stop covering you just because it says that the knowledge of one director is imputed to all directors! You would want the policy to continue to provide you with protection should a claim arise against you. This can be achieved by ensuring that the policy contains very strong severability language that makes it clear that the actions of others, of which you were unaware, will not restrict your rights under the policy.
4. INVESTIGATION COVER NOT CONNECTED TO A WRONGFUL ACT
   Almost all D&O policies cover an Investigation when there has been an allegation of wrongful act e.g. the regulator/statutory body alleges you have provided misleading statements and is now investigating you. In practice however these investigations are often conducted to find evidence of a wrongful act.
   If your policy connects coverage for investigation costs to an allegation of a wrongful act, then you will have no cover for the times when the investigation is simply trying to find evidence of a wrongful act, but not alleging one in the first instance. This cover is readily available, but is not always standard so it is essential that you ensure your Insurance Broker has secured a D&O policy which adequately covers this contingency.

If you tick these 4 boxes you have gone a long way to ensuring that your Directors & Officers Liability Insurance Policy will deliver the coverage you expect in the event of a claim which, after all, is what you are paying for!

For further information contact Jim Malady 0418 334 685.

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