Increasing claim numbers, the pandemic, cyberattacks and natural disasters are some of the reasons directors’ and officers’ liability (D&O) insurance premiums are rising. Another is less competition, as six insurers decided in the past year to no longer offer this cover. However, premiums were on an upward trajectory even before the pandemic began.
D&O insurance in a nutshell
D&O insurance covers your financial costs arising from claims relating to a breach of your duty or failure to meet an obligation. Shareholders, regulators, employees, creditors, competitors, customers, liquidators, other board directors or your company itself are all eligible to make a claim. D&O insurance, though, won’t cover reputational loss, personal financial losses, fines or penalties for criminal offices, fraud, wilful misconduct and criminal conduct.
The three-part split of D&O insurance cover:
- Side A: Coverage for liabilities and court defence costs due to directors’ or officers’ wrongful acts in their line of work. This protects past and current directors and executives.
- Side B: To reimburse the company of directors’ liability, such as under a deed of indemnity
- Side C: Where the company’s breaches of the securities market and other public securities trading lead to claims.
Importantly, over the past couple of years, limits of cover for each of these have shrunk.
Some good news in the mix
But there is some positivity. Federal Treasurer Josh Frydenberg has permanently changed the continuous disclosure regime to make it tougher for disgruntled shareholders to show companies had knowingly misled them. Those shareholders must now prove directors didn’t promptly inform them of time-sensitive information, doing so with “knowledge, recklessness or negligence”. If those charges are proven, companies and their officers will be liable for civil penalty proceedings.
Previously, the rule centred on non-disclosure of something a reasonable person would expect to change the share price. The continuous disclosure change took effect May 2020 as a temporary measure, but the Treasury Laws Amendment Bill (2021 Measures No. 1) Bill 2021 made it permanent from 14 August. According to professional services firm, KPMG, listed entities should notify the ASX immediately about information that a reasonable person would expect to materially affect its share price. There are exceptions, and you’ll find the relevant ASX Listing rule 3.1 here.
Treasurer Frydenberg’s changes also have limited claims for loss or damage resulting from misleading or deceptive conduct related to an alleged continuous disclosure breach.
In all, the changes reduce uncertainty about continuous disclosures and help listed entities feel more comfortable about offering accurate forecasts in a post-COVID-19 world.
What can you do about the changing costs?
Keep in mind these factors that will impact your premium pricing:
- Your company’s size
- The experience and history of your board and management
- Shareholder numbers
- Number of staff
- Operations scope and jurisdictions
- Your company’s organisational strength
- The policy structure
- Your company’s claim history.
If you’re thinking about going public with your company, consider investing in IPO insurance. It effectively ‘ring fences’ your IPO exposure from your annual D&O insurance policy, which could work out cheaper overall.
So, whether your company is publicly or privately listed, here’s how you can minimise rising premium costs:
- Start preparing for your policy renewal at least four months before the renewal date
- Review your biggest risks and detail your management approach so that you can demonstrate these at renewal time, and
- Be explicit about your company’s way of disclosure material events to shareholders and, if relevant, promote how you’ve done this in the past.
Working with a licensed, reliable professional who has dealt with the complexities of D&O Insurance can potentially help you manage your rising premiums while also providing sound, strategic insurance advisory. Get in touch with us to ensure your risk management approach for D&O insurance is the most appropriate now and into the future.