D&O insurance - far more than a ‘nice to have’

The Institute of Directors (IoD) together with Marsh and MinterEllisonRuddWatts are reminding directors of the importance of having directors and officers (D&O) liability insurance, in a report released today on current trends and issues in the D&O market.

According to IoD Governance Leadership Centre General Manager Felicity Caird, directors are “facing an increasingly challenging operating and regulatory environment, which is also impacting on the insurance market”.

“Director roles and responsibilities have increased over recent years and policy-makers continue to target directors for personal liability,” says Ms Caird.

Meanwhile, MinterEllisonRuddWatts Partner Andrew Horne says that “regulators are showing more teeth, group or ‘class’ actions are on the rise, and litigation funders and activist law firms are changing the nature of the legal landscape”.

Given this situation, Marsh Chief Client Officer Steve Walsh says “D&O insurance is more important than ever but the market is hardening with premiums rising, and insurers becoming more conservative and selective in their underwriting”.

“The cost of D&O insurance premiums has increased significantly in Australia and New Zealand, and premiums for some organisations in 2019 have more than doubled,” says Walsh.

From a broker perspective, Walsh says that “not all policies are equal and it is essential that directors have a policy tailored to cover risks specific to their organisation”.

From a legal perspective, Horne adds that “it is recommended that directors and officers take time to understand the impact of all policy conditions, endorsements and exclusions in light of the risks their business faces, and think carefully about whether their policy limits are aligned with the worst-case scenarios”.

Only 76% of organisations provide directors with liability insurance, according to IoD data.

“We actively encourage all board members, including those in not-for-profits and small and medium organisations, to consider D&O insurance to cover them in their roles,” says Walsh.

It is expected that the D&O insurance market trends will continue for some time, and may even get worse for some industries.

Horne says “the confluence of increasing regulation and litigation risk on one hand and a hardening liability insurance market on the other is challenging for directors”.

“The convergence of these trends could potentially discourage talented directors from joining boards which will be detrimental to the performance of organisations and ultimately to New Zealand” adds Caird.

Five considerations

IoD, Marsh and MinterEllisonRuddWatts recommend five key considerations, for directors, when obtaining D&O insurance:

1. When setting limits, it could be as many as 10+ years before a claim is made. Consider how the quantum of the risk may rise in that period.
2. Legal defence costs may rise in the same period and may be increased by a greater number of directors and officers over time and the potential need for separate representation.
3. Consider changes that are likely to happen in the future in terms of developments in the standards required or the duty of care.
4. Consider personal circumstances and ability to defend and/or fund a loss if there is limited or no insurance
5. Think about whether one’s industry sector/company is susceptible to class actions, other group litigation, or new types of regulatory action and penalties.

The state of the D&O insurance market and significant developments are outlined in the report Directors & Officers Insurance – trends and issues in turbulent times. It also highlights insurers’ areas of interest, key coverage issues and what’s next for the market.

For a full copy of the publication visit iod.org.nz

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