Spotlight on… director’s liability

Spotlight on… director’s liability | Insurance Business New Zealand

Spotlight on… director’s liability

The recent High Court ruling in the Mainzeal case highlighted significant issues for directors, their brokers, underwriters and ultimately about the quality of governance.

No doubt more developments will flow from the Mainzeal judgment, and the details of the case can speak for themselves. What is of interest is the level of exposure directors face and how there is every likelihood that more litigation will occur if what is happening across the Tasman migrates here.

Directors will likely feel secure if their D&O policy provides the board with cover limits up to $10 million or $20 million. Such substantial sums, they might assume, would be more than adequate to meet all eventualities.

As this case has shown, the compensation payable for a breach of duty may exceed the sum insured and, importantly for individual directors, the sum insured in the aggregate stretches far less when split across all directors. Spreading a sum insured across multiple directors may also raise tricky questions about apportionment. Brokers and directors need to be considering whether they really do have enough cover in place.

Surprisingly, the Institute of Directors’ research shows that 24% of directors do not have D&O cover. So, the potential to take a very substantial personal hit is significant, and a gap brokers could fill.

Directors, whether of trading companies of not-for-profits, have challenging responsibilities and duties which have grown substantially. They may carry liability from their own or business’s wrongful actions or decisions. Claims can be made by members of the public, employees, shareholders, creditors or even competitors.

Directors have responsibilities under a wide range of Acts including the Companies Act, the Commerce Act, the Fair Trading Act, and the Health and Safety at Work Act. This may include, among other things, the health and safety of their staff financial filing deadlines, regulatory reporting and adherence to laws governing the business’s operations, and governance decisions.

When substantial awards are made by courts against directors, it is always a concern to underwriters whether the court looks to whether insurance is in place to determine the level of damages. How deep the insurance pocket is should have no bearing on the level of damages to award, but that is not always the case.

It is noteworthy that the Mainzeal case was not settled out of court and that litigation funders backed the action. Liquidators and litigation funders will only be encouraged by the result.

There is a warning here though. Last year, a Marsh report on the Australian market observed a 250% spike in D&O insurance from 2011-18 for ASX companies on the back of over $1 billion of securities class actions over that time. The result has been higher rates, some withdrawal from the market and higher risk retention. The ability to continue to attract talent to provide quality governance has been questioned.

Here, litigation funders face no regulation about fee structures or the potential conflicts between their interests and that of the plaintiff. The door is open. Should class actions step in as they have in Australia, there will likely be impacts on the cost and availability of D&O cover as has occurred there.

The New Zealand Law Commission has considered probing the topic of class actions and litigation funding. It may be timely to make a start.