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After years of premium increases and limited capacity the directors and officers' liability insurance market is easing, with cover becoming more available and affordable — but there are still significant considerations that will have long-term impacts for company boards. Recent high profile liability claims and cases represent warnings for Australian businesses and their senior executives.
Gallagher National Head of Financial Lines — Professional & Financial Risks, Michael Herron provides key insights to be aware of.
Q: What are the signs that we're emerging from a hard market?
A: Directors and officers' (D&O) liability insurers are piling back in, competitively quoting risks they previously declined or had quoted at uncommercial terms. In this more accommodating insurance environment directors once again have options to increase limits or negotiate coverage with insurers eager to deploy their reinvigorated appetite.
However, while D&O cover is more generally available some high profile cases involving large claims losses are likely to impact the market and pricing. These have included cyber security breaches and 'greenwashing': overstating environmental, social and governance activities or misrepresenting the business's actions.
Q: What is driving an increased focus on ESG and cyber risk?
A: With incontrovertible evidence of climate change and a surge in the activities of cyber criminals, 2022 was the year environmental, social and governance (ESG) and cyber risk got real. The Optus and Medibank hacks and compromise of massive amounts of data in global terms were described as a wake-up call for all Australian directors who could potentially be held liable for failings in the security of client information.
The Australian Securities and Investments Commission's (ASIC) 'greenwashing' crackdown imposed fines on the Australian Stock Exchange-listed Tlou Energy in October 2022 for carbon footprint statements concerning electricity and gas projects said to be "factually incorrect", and investment management company Vanguard Australia in December 2022 for overstating the extent of an investment screen for preventing tobacco company investments.
While the ASIC fines were paid in compliance with infringement notices that didn't constitute an admission of guilt or liability, these actions are a clear statement of intent by the regulator to put directors on notice.
Q: How are continuous disclosure obligation breaches and class actions impacting the Australian D&O market?
A: Alleged misleading statements or omissions in the disclosure documents for capital raisings by debt or equity securities offerings have been behind recent continuous disclosure and class action-related D&O losses. These proceedings increasingly involve allegations of breaches of directors' duties, and often follow regulatory actions against directors.
Directors' duties are at the heart of the ASIC prosecution of 11 Star Entertainment Group executives and directors. ASIC Chairman Joe Longo described the Star action as a "landmark case" for corporate governance, prosecuting directors on the basis of their duty to use 'due care and diligence' in making proper enquiries and to address foreseeable, observable risks. Potential defendents include the management and board, former managing director/CEO, former chair, and former company secretary/general counsel.
What makes this case so extraordinary is that it is only the third time that ASIC has sued the entire board of an Australian Stock Exchange-listed company, after bringing civil penalty proceedings concerning directors' duties against James Hardie directors in 2007 and Centro Properties Group directors in 2009.
Protection for the year ahead
Access to the best available D&O coverage is considered a priority, with improving market conditions allowing a focus on the quality of the insurer and the terms and conditions on offer. Insurers vary enormously in underwriting expertise, claims experience, trading history, ratings, prudential regulation and reliability credentials.
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