insuring you get it right

  • Date:01 Oct 2005
  • Type:CompanyDirectorMagazine

Insuring you get it right

‘My good friends, for the second time in our history, a British Prime Minister has returned from Germany bringing peace with honour. I believe it is peace for our time ... Go home and get a nice quiet sleep.”
– Neville Chamberlain 1938.


Ever since Neville Chamberlain uttered those prophetic words, the idea that any piece of paper can bring peace in our time and a good night’s sleep has long been relegated to the dustbin of history.
Ironically, Chamberlain’s words gave birth to the often-used reverse of his meaning in “what keeps you awake at night?”
And the piece of paper that is keeping directors awake at night, or should, is the detail contained in their D&O insurance policy.
Any prudent director already on a board or thinking of joining one would, as part of the due diligence, inquire about the extent of the D&O insurance policy. Remarkably, however, few directors will delve into the detail of the policy and its coverage and rely instead on the company secretary or other company officer to provide reassurance.
And even if the policy is scrutinised, the reality is that what a policy appears to say and what it actually means in law is often quite different. Insurance language bears little resemblance to the normally understood meaning of words.
As some people of New Orleans are finding out when they contacted their insurers, the assumption that they were covered because water destroyed their homes is quite wrong. If it was a flood they are not covered, if they can prove it was a storm surge then they are. In insurance parlance, water in your living room is a matter of definition.
D&O insurance suffers from the same vagaries of definition. It is why the AICD, in conjunction with Strategic Insurance & Risk Solutions (SIRS), have developed a guide for D&O which can be accessed via the AICD website in November.
(Last month the AICD in conjunction with PricewaterhouseCoopers launched its Shareholder Friendly Financial Report (see CEO Report and story on Page 17) as a guide to help companies present the financial detail contained in annual reports in plain English format.
The site will contain explanations which will assist the novice in obtaining an understanding of D&O insurance. It has also been designed to assist the experienced buyer with information on issues such as how to maximise D&O insurance submissions and clauses to watch.)
Basic information will be available to anyone. More detailed information on D&O insurance will only be available to AICD members.
The website will provide access to up-to-date information on issues:
• Why your organisation should have D&O insurance;
• Who in the organisation is covered;
• Where claims can originate;
• What is covered; and
• What is generally not covered.

Role of D&O
Provides blanket cover for all directors and officers of a company in respect of liability for damages or compensation together with associated legal costs resulting from a “wrongful act” committed while acting in the capacity as a director or officer.
There are a number of hybrid versions of this cover issued by various insurers. They can include a variety of extensions to cover.

Personal D&O Insurance
While this insurance also provides cover for legal defence costs and liability for awards of damages resulting from a wrongful act  it may often provide cover for matters not covered by corporate D&O liability insurance.

Supplementary Legal Expenses D&O Insurance
This contract provides protection for directors, officers and the company for some of the matters excluded from cover under corporate D&O insurance. This cover can only be purchased in conjunction with a current corporate D&O insurance policy.
One of the most important aspects of D&O liability insurance is that it is supposed to cover the legal costs required for a director or officer to defend a legal action against them alleging that a “wrongful act” has been committed.
Directors and officers can of course be protected by indemnities from their organisation but without appropriate D&O insurance, the organisation’s assets could be exposed to the costs of funding a legal defence or indeed an award of damages.
Discussion provided on the D&O insurance website will assist in considering how each of the following could impact upon you and your organisation:
• Legal defence costs and settlements;
• Prosecutions, investigations and inquiries;
• Employment practices liability;
• Directors and officers personal liability; and
• Economic loss to the company.
The website will also include a section which discusses the roles of insurance brokers, insurers and underwriters in your purchase.
D&O insurance is highly technical and it is therefore recommended that you look for insurance brokers that can demonstrate specific D&O insurance expertise. Some insurance brokers employ D&O insurance specialists.
Included in this section are some helpful hints to assist in selecting your broker.
A ground breaking feature of the website is a section that provides a list of Australian based D&O insurers with details of their capacity and underwriting philosophies.
You will find information on each, including the limits of indemnity available from them, their target market, their appetite for certain industries and underwriting philosophy.

The purchase of
D&O insurance

Many organisations may not be in a position to demonstrate strong financial performance over a period of time or may have issues which prevent underwriters from readily identifying them as a good risk.
The website will help identify the key features of a well-designed and presented D&O insurance proposition. Discussion includes:
1. Planning/timing;
2. Quality of information for underwriting purposes;
3. Underwriting;
4. Insurance broking role;
5. Meetings with insurers; and
6. Analysing quotations.
D&O insurance contracts vary significantly among the insurers offering this protection. It is therefore important for directors to compare policies closely.
There is no substitute for reading the specific terms and conditions of the policy and comparing these between policies.
Disclaimer: AICD and SIRS do not have any relationship with or endorse any of the insurers, brokers or specific policies which may be referred to in this article or on the D&O Insurance website