Directors and officers are required to adhere to a raft of rules and legislation when operating a business, including corporate and prudential; work, health and safety; environmental; copyright; and customs. The direct impacts of the 2020 bushfires and Covid-19, as well as the subsequent and sustained financial downturn, will create significant additional risk to company directors and officers.
These changes to trade, regulatory, and economic conditions are contributing to a significant shift in the insurance market’s approach to Directors & Officers insurance.
Insurers are taking many different measures to respond to the change in risk:
- Underwriters are reducing their capacity (i.e. their maximum liability) to D&O risks. Some insurers are withdrawing from the D&O market altogether, some are withdrawing from certain occupations and some are reducing the amount of capacity they are prepared to allocate to a risk (e.g. from $20m to $10m).
- Underwriters are requesting more information from Insureds and generally being more thorough/selective in their underwriting.
- Underwriters are frequently reviewing and changing their underwriting guidelines and coverage conditions. Whether it is for a new policy or renewal, underwriters are using one or more of the following:
- Higher deductibles;
- Event specific exclusions (e.g. Royal Commission, Covid-19);
- Less favourable terms and conditions, such as removal of coverage for failure to pay staff or removal of the discovery period should the policy not be renewed.
- Underwriters expect more premium for their capacity.
Why is this happening?
Following a period of soft market conditions between 2012 and 2017, several events have coincided to cause a rapid change to the Directors & Officers insurance market. Some of the key contributing events are:
- Royal Commissions, such as the Banking and Aged Care Royal Commissions, which have contributed significant claims for legal fees to prepare and respond to the investigations.
- Class actions, often funded by specialist litigation funders, have contributed significant claims for legal fees and compensation payments to D&O insurers. Recurring cause for class actions is the alleged breach of disclosure rules or underpayment of staff. Also, it is increasingly common to see individual directors named with the entity, which has led to additional counsel being instructed and higher legal costs.
- Bushfires and Covid-19. Specifically, insurers are concerned by the potential for widespread claims and they are thoroughly reviewing a company’s:
- Financial resilience to forced shutdowns and a slower economy.
- Contractual commitments and exposure to fines and penalties.
- Response to protect staff from infection of Covid-19, and their management of any restructure to working conditions and pay.
- Shareholder communications and due diligence as businesses ‘pivot’ and change quickly.
- Regulatory communication.
What can you do about it?
Now more than ever, companies need to demonstrate good company structure, risk management framework and diligent management. Like Warren Buffet’s Noah Rule – predicting rain doesn’t count, building arks does – directors are not expected to predict every event, they are required to have structures and plans in place that are resilient and allow sensible decision-making through a major disruption or crisis event.
- Cyber and Privacy: Ensure that a transition to remote working has not compromised cyber security and handling of confidential information. Review and update controls, especially as businesses policies change.
- Employment practices liability: Ensure that restructuring and cost cutting is managed with the appropriate advice, early employee consultation, flexibility, and formal procedures.
- Continuous disclosure: Ensure that continuous disclosure rules are adhered to as the market moves and businesses make fast-paced changes.
- Disclosure of material changes: Notify underwriters of any material change in risk, if required by your policy terms and conditions.
- Trading whilst insolvent: Thoroughly review your financial position and take expert advice when considering taking on debt, raising capital, or taking on other liabilities.
- Capital raising: Ensure speed of raising capital does not compromise due diligence and disclosure. Also, ensure any emergency capital raisings are covered by your insurance and consider ring-fencing cover with a standalone prospectus policy.
In seeking renewal terms, it is important that you demonstrate good busines management to your insurer. Approach the market early to allow sufficient time for negotiations and, if claims arise, notify early, and notify often.
Barrack Broking is here to assist
If you have any queries regarding the changing risk for directors and officers, contact us for a confidential discussion: Phone 02 9191 7320 or email firstname.lastname@example.org.