Some skilled businesspeople are asked to sit on the boards of organisations outside their own, either by their own employers in an allied business or by the external organisation itself. In either case it's important to have insurance protection against potential legal actions directed at you personally and related to fulfilling this type of role.
There are some key protections available under these conditions:
- via a deed of indemnity, access and insurance from the external entity
- by outside director liability coverage.
What protections do a deed of indemnity offer directors?
A deed of indemnity is intended to protect directors from personal financial risk when acting in their capacity as a director. Under the deed an organisation agrees to cover liabilities and associated costs that a director may incur while fulfilling the role.
The purpose is twofold:
- to provide an incentive for individuals to serve as directors, knowing they have some protection against potential legal issues
- to help ensure the director will make decisions in the organisation's best interests, without fear of being held personally liable.
For the organisation, a deed of indemnity specifies the extent of its obligation to the director concerned. The deed will typically include provisions that set out the organisation's obligation to maintain directors and officers' liability insurance.
There are some limitations to deeds of indemnity: they don't cover gross negligence, wilful misconduct or deliberate breach of duty, or where the organisation is legally prohibited from indemnifying the director (for example, under section 199A of the Corporations Act). Also they can't be invoked if the organisation doesn't have the financial capacity to pay.
What protections does outside director liability insurance offer directors?
When a business asks a director to serve on the board of another organisation it raises the question of how they can protect themselves if they assume this additional responsibility at the request of their employer.
Outside director liability cover is usually an extension of the business's directors and officers' (D&O) liability insurance that already applies to the director in question.
It covers claims arising from a director's service on the board of an external organisation, whether it's a not-for-profit, for-profit or another type of entity, where that directorship is at the request of, or with the formal consent of, the director's primary organisation/employer.
Outside director liability has an important function when the outside entity's own D&O policy may have limitations, exclusions or insufficient limits to fully cover a claim against the director.
Outside directorship cover, however, typically provides cover in excess of any indemnity or insurance available from or provided by the outside entity. In other words, the outside directorship cover only applies after any indemnities or insurances via the outside entity have been exhausted.
Businesses considering outside director liability cover should notify their insurer of outside directorship appointments, as some policies may require notification within a specific timeframe, such as 60 days, and may require additional premium or information.
Outside director liability policy terms and conditions should be examined carefully since their coverage may have specific exclusions or limitations. For example, typically coverage doesn't extend to individuals representing the other owners in a minority-owned entity.
Directors serving on dual boards need to be conscious of potential conflicts of interest and recuse themselves from decision making if there is any doubt.
It's essential for businesses to ensure their own D&O cover is adequate and to conduct due diligence on the external organisation to assess its risk profile before asking one of their own executives to sit on an external board.
The optimal solution for directors to protect themselves is to seek a deed of indemnity, access and insurance from the outside entity, as well as ensuring that D&O cover provided by their primary organisation includes cover for outside directorships.
Broker expertise in D&O insurance cover is critical
Purchasing D&O cover through a broker who thoroughly understands your situation, business and the complexities involved with outside directors liability is crucial to accessing insurance that provides protection for the relevant risks you need to consider.
Gallagher has a dedicated team which specialises in D&O insurance. We take the time to gain a deep understanding of your business and industry, and work in partnership with your team to implement a robust risk management program that protects you now and into the future.