Exposure for directors and officers (D&Os) to continue – or get worse

Company directors should brace for tougher regulations and secure directors and officers (D&O) insurance to cover them in worst-case scenarios.

That is the reminder from the Institute of Directors (IoD), alongside Marsh and MinterEllisonRuddWatts, in its Directors & Officers Insurance – trends and issues in turbulent times report. IoD said directors are facing an increasingly challenging operating and regulatory environment, which is also impacting on the insurance market.

“Director roles and responsibilities have increased over recent years and policymakers continue to target directors for personal liability,” IoD governance leadership centre general manager Felicity Caird said.

Meanwhile, MinterEllisonRuddWatts partner Andrew Horne claims “regulators are showing more teeth, group or ‘class’ actions are on the rise, and litigation funders and activist law firms are changing the nature of the legal landscape.”

This situation makes D&O insurance “more important than ever,” Marsh chief officer Steve Walsh noted. However, the market is hardening with premiums rising, and insurers becoming more conservative and selective in their underwriting, he said.

“The cost of D&O insurance premiums has increased significantly in Australia and New Zealand, and premiums for some organisations in 2019 have more than doubled,” Walsh said. “[N]ot all policies are equal and it is essential that directors have a policy tailored to cover risks specific to their organisation.”

According to IoD data, only 76% of organisations provide directors with liability insurance. It suggests D&O insurance market trends will continue for some time, and may even get worse for some industries.

Read more: Revealed: Top five risks facing directors in 2019

“We actively encourage all board members, including those in not-for-profits and small and medium organisations, to consider D&O insurance to cover them in their roles,” Walsh said.

“The confluence of increasing regulation and litigation risk on one hand and a hardening liability insurance market on the other is challenging for directors,” Horne noted.

“The convergence of these trends could potentially discourage talented directors from joining boards, which will be detrimental to the performance of organisations and ultimately to New Zealand,” Caird added.

Here are five key recommendations for directors, as outlined by IoD, Marsh and MinterEllisonRuddWatts, when obtaining D&O insurance:

1. When setting limits, it could be as many as 10+ years before a claim is made. Consider how the quantum of the risk may rise in that period.
2. Legal defence costs may rise in the same period and may be increased by a greater number of directors and officers over time and the potential need for separate representation.
3. Consider changes that are likely to happen in the future in terms of developments in the standards required or the duty of care.
4. Consider personal circumstances and ability to defend and/or fund a loss if there is limited or no insurance.
5. Think about whether one’s industry sector/company is susceptible to class actions, other group litigation, or new types of regulatory action and penalties.