Gallagher issues warning on directors' liability risks post COVID-19 relief

Government suspended directors' duty relating to insolvency risks in 2020

Gallagher issues warning on directors' liability risks post COVID-19 relief

Professionals Risks

By Roxanne Libatique

The Australian government helped businesses during the COVID-19 pandemic last year by temporarily suspending some business directors' duties relating to insolvency risks. However, directors' obligations have reverted to the standard insolvency liability regulations this year.

The government's 2020 insolvency relief, a part of the Australian Coronavirus Economic Response Package Omnibus Bill, aimed to prevent insolvent trading and any associated personal liability for directors if the relevant debt was incurred “in the ordinary course of business” (section 588GAAA), according to legal firm Clyde & Co.

However, Gallagher warned that the government JobKeeper wage subsidy supporting businesses and employment last year ceased in March 2021, leaving businesses to face financial challenges that could lead to closures and insolvencies.

 The brokerage reminded businesses, directors, business owners, and senior executives to consider the drivers of potential insolvency liability and address the increased risks of insolvency liability claims under the businesses' directors and officers' (D&O) liability insurance.

“Insolvency is a business risk stemming from debts or liabilities owed and an inability to service them according to agreed terms,” said Robert McCabe, the NSW manager for financial lines, professional, and financial risks at Gallagher.

Gallagher emphasised that insolvency-related claims and risks are crucial under the D&O or management liability policies, adding that the recent regulatory changes and insurers' decisions on considering potential claims are complex.

“Following COVID impacts and government-adjusted regulations, some insurers have sought to impose insolvency exclusion in their D&O policy wordings,” Gallagher said.

“An expert insurance broker with specialised D&O knowledge can consider and evaluate policy wordings and the relevance of specific clauses to your business's situation and the exposures this brings.”

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