The role of the broker is to ensure the cover is appropriate, exclusions are understood, and claims processes are clear - before an issue arises. Here are some key takeaways from a recent IBANZ seminar on D&O liability insurance to help brokers navigate these challenges.
What is D&O insurance, and why is it essential?
D&O insurance is specialist liability cover that protects company directors, senior officers, and in some cases the company itself, from legal and financial exposure arising from management decisions.
It can cover:
• Directors' personal liability for wrongful acts while acting in their capacity as a director or officer.
• Company reimbursement where the company indemnifies a director or officer and seeks repayment from the insurer.
• Entity cover in some policies, where claims are brought against the company alongside its directors or officers.
Under New Zealand law, directors can be personally liable to the company, shareholders, creditors, regulators or third parties. The Companies Act sets out extensive fiduciary and statutory duties. Breaching these can lead to significant claims, especially around insolvency, mismanagement or misleading conduct.
A D&O policy generally covers legal defence costs, payment of settlements or damages, and provides protection even in complex regulatory or civil claims, provided the actions weren’t criminal, fraudulent or excluded.
D&O insurance is different to professional indemnity (PI). Where PI insurance typically provides cover in relation to professional conduct in the course of the business of the company, D&O insurance will provide indemnity to directors in relation to their general management of the companies’ affairs.
All D&O policies are not created equal
Policies differ vastly in definitions, exclusions and triggers. What one insurer defines as a ‘wrongful act’ or ‘claim’ could dramatically affect whether a director is covered. Never assume a D&O policy is standard. Always check the details and compare definitions, exclusions and sub-limits.
Watch out for insolvency exclusions
Insolvency claims are some of the most common claims arising in relation to D&O policy. However, similar to leaky building claims under general liability policies, many insurers have sought to carve out claims for insolvency by including an insolvency exclusion. It is important to be aware of the insolvency exclusion clauses and give careful consideration to their wording when advising potential insureds on the extent of cover available
Insolvency exclusions can result in an uninsured portion of the loss claimed. Defence costs may be covered if the actions of the insured lead to insolvency due to this portion of the claim not arising out of insolvency. But an award by the Court for damages caused to creditors as a result of the insolvency may not be covered under the insolvency exclusion, as these losses will be considered to have arisen directly out of the company’s insolvency.
Severability clauses matter
When there are multiple insureds, the cover can be either be joint or composite. Joint means the cover is for all insureds, and the effects of any failure to comply with the terms and conditions will be against all the insureds. Composite means that while there is only one insurance policy, the policy is seen as a set of separate contracts between the insurer and the various insureds.
A severability and non-Imputation clause can, however, protect innocent directors or officers if another director or officer has breached the terms of cover available under the policy, provided that the innocent insured had no prior knowledge or involvement in the conduct of the non-innocent insured.
A severability and non-Imputation clause can create a notable benefit for companies with a sole director and shareholder, as the company is considered a separate entity under the policy. Where a sole director/shareholder has been dishonest and cover for them is excluded, the severability and non-imputation clause can be triggered, meaning cover could be available for the company.
Claims must be promptly notified
D&O policies are claims-made. Generally, there is an obligation to notify both a claim or circumstances that may give rise to a claim. In order for there to be a valid claim, there must be some third-party demand against the insured for compensation or clear intention to hold the insured responsible for a loss suffered.
A D&O policy is always triggered by a claim alleging a wrongful act. It’s important to check the relevant wrongful act definition in the policy regarding the nature and type of claim and applicable cover available.
A claim can be a written or oral demand for relief. An expression of dissatisfaction or a mere request for information without a demand for relief is most likely to not constitute a claim, as it does not convey that the third party intends to hold the insured liable. Rather, this will likely constitute a circumstance that may give rise to a claim, but will most likely need to be notified regardless.
Useful extensions
It’s important to understand any relevant automatic extensions which can provide useful additional cover.
Examples include:
• Outside directorship - cover for roles held in external companies
• Employment practices liability - cover for grievances and workplace disputes
• Investigation costs - for regulatory or government inquiries
• Continuous cover - important if a client fails to notify a known circumstance under the prior policy
Separate defence and liability limits essential
This issue arises where the potential loss could reach the limit of indemnity cover without being able to meet both defence costs and liability claims. If defence cost and liability limits are not separate and ringfenced the insurer may not pay defence costs in the course of the claim out of concern that there will be nothing left to cover the potential liability.
Most D&O policies now provide separate indemnity limits for defence costs and liability. Look for polity wording that provides for defence costs cover in addition to the insurance monies payable to meet a third-party liability claim.
The final word.…
Remember, no two D&O policies are the same. Policy wordings, definitions, exclusions and extensions vary significantly between insurers. Coverage for specific risks such as an insolvency claim, defence costs, or severability for innocent directors, can all turn on the specific language of the individual policy. Even commonly used terms such as ‘wrongful act’ or ‘claim’ can carry definitions that differ from their ordinary meanings. Always review the wording of the policy closely. Check for key exclusions and extensions.
When a claim arises, follow notification procedures correctly. D&O cover usually requires prompt notification to trigger cover. Failing to do so can result in losing cover - even for otherwise insurable claims.
