In Australia, company owners, directors, senior managers, and board members are obligated to uphold various laws, which can hold them personally responsible for several aspects of business operations. Added to this, liabilities often remain after a senior decision maker has left the company and being held personally liable means their own assets could be at risk.
Management Liability insurance cover is designed to financially protect businesses and individuals who find themselves in breach of their directors’ and or officers’ duties, which can include costs of statutory liability fines and penalties. After premium hikes to Directors and Officers (D&O) liability insurance and Management Liability policies throughout 2020, many private companies are experiencing improved market conditions in 2022. Rate increases may persist, although this has decelerated considerably for those with lower risk profiles. We are therefore confident the hard market conditions have eased for private and not-for-profit companies.
KEY ELEMENTS OF A MANAGEMENT LIABILITY POLICY
- Directors’ and officers’ (D&O) liability / Company Reimbursement
Protection for company &/or its directors and officers from claims arising out of any decisions and actions while carrying out their duties
- Employment Practices Liability (EPL)
Protection for companies against allegations for unfair dismissal, sexual harassment, discrimination, and other employment-related incidents including vaccine mandates
Protection for a company, senior management, and employees for allegations of wrongful breaches of key legislation during the course of business operations
Protection for companies against fraud and dishonesty by employees and thirds parties
Protection for companies against the cost of responding to tax audits, undertaken more commonly by the Australian Taxation Office. Some policies may extend to state revenue office reviews
INSOLVENCIES AND D&O LIABILITY
Historically, insolvency is a major cause of D&O claims as insolvency practitioners look to recover losses from directors. There are many ways stakeholders could target directors following insolvency (e.g., alleging that boards failed to prepare adequately for a pandemic or for prolonged periods of reduced income). The following items are common triggers for claims against directors and entities:
- Not meeting financial and contractual obligations.
- Not considering supply chain risk and the business impact associated with delays.
- Not adhering to compliance requirements set out by specific legislation.
Insurers will continue to focus on clients’ financial health, particularly in the wake of the pandemic and possible inflation. Companies with lower risk profiles are experiencing more competitive rates. Insurers are maintaining higher deductibles to insulate their portfolios and providing more coverage for catastrophes to help retain clients.
While COVID restrictions have eased noticeably, there remains uncertainty around the impact of new variants, inflation, the Ukraine and Russian conflict and related oil prices, supply chain interruptions, and how these factors will impact capital markets over the coming 6 months.
Other concerns include:
- Bankruptcy/restructuring: Insolvencies over the past 2 years were significantly lower than previous years. As the Government’s COVID subsidies ease/end, there is concern over a potential rise in bankruptcy claims, which impact both private and public companies.
- Environmental, Social and Governance issues (ESG): The growing focus on ESG issues in the investor community is seeing more businesses reassess their priorities. Evidence of board diversity and robust corporate diversity and inclusion practices are critical to limiting D&O risk. Questions around the adequacy of disclosures create both investor and regulatory risk exposures, resulting in greater underwriter scrutiny of ESG practices more broadly.
COVERAGE CONCERNS FOR CLIENTS
- Cyber risks for Directors and Officers remain challenging – see our briefing for business leaders here.
- Employment related issues – Emergence of unfair dismissal claims in response to vaccine mandates.
- OH&S fines and penalties are not insurable in NSW and VIC. In Victoria, the amendment to the Occupational Health and Safety Act 2004 will prevent directors and officers from being indemnified by a company or insured for breaching workplace safety laws. The amending legislation does not prohibit insurance covering defence costs for OH&S investigations and prosecutions. Such defence costs can often exceed the penalties ultimately imposed. The amending legislation also does not prohibit payment of prosecution costs, which will almost always be ordered by the Court if a prosecution results in a guilty plea/finding of guilt. It also does not prohibit payment of damages which may be ordered by a Court. Honan is currently developing a market update on this topic.
PRIVATE D&O / MANAGEMENT LIABILITY CLAIM TRENDS 2021-2022
- Prevalence of Computer Fraud claims has increased, in line with increased cyber claims activity.
- Rates of Social Engineering Fraud are relatively stable (but elevated following a spike 2-3 years ago).
- Certain industries are experiencing higher than average losses, particularly construction and retail.
Expectations for the next 12 months and what are insurers discussing?
Insurers did not see the anticipated rise in Crime losses in previous economic downturns (likely due to Government intervention). However, discovery of incidents may have been delayed and could emerge as more people return to offices.
The following industries are most affected by losses and will experience greater scrutiny at renewal: oil and gas, healthcare, life sciences, construction, higher education, retail, and hospitality.
A FINAL NOTE
As always, engagement well in advance of renewal dates is required. A considered plan and clear timeline will help to guide all parties through a more successful renewal.
Placement Manager – Professional & Executive Risks