Not all D&O policies are created equal, and prudent Boards will ensure that their D&O covers are appropriately tailored to their particular risks. In this update we take a look at the trends dominating recent discussion and the key considerations for Boards evaluating their D&O cover.
Cyber and data loss risk. High-profile cyberattacks over the past several months on organisations such as the Waikato District Health Board, the Ministry of Justice and Mercury IT (to name just a few) have continued to reinforce the importance of ensuring organisations invest in appropriate cyber protections and training and that Boards actively engage with the assessment of their companies' cyber risks and response strategies.
Environmental, social and governance issues. Climate change has been a particular focus due to increasing societal awareness of the impacts of climate change, Aotearoa New Zealand's world-first enactment of legislation mandating climate-related reporting for financial market participants1 and endeavours by claimants to enforce climate-related agendas through litigation2. The Companies (Directors Duties) Amendment Bill proposes to amend the Companies Act expressly to permit a director to take into account "recognised environmental, societal and governance factors" when determining the best interests of the company.
Health and safety. There is a continued focus on officers' due diligence duties under health and safety legislation. Prosecutions are currently on foot against directors in connection with the Whakaari/White Island eruption, and there are now examples of directors being convicted and fined (as well as being required to pay reparations) for failing to exercise due diligence to ensure compliance with the company's health and safety obligations.
Class actions. Particularly for companies with ASX exposures, the risk of shareholder class actions and the impact of that risk on D&O pricing have been at the forefront of every D&O renewal discussion. In New Zealand, the prevalence of litigation funders and the class actions they support continues to grow. Te Aka Mautua o te Ture Law Commission has recommended the enactment of new class actions legislation to make the class action regime clearer and more accessible, with proposed features including the preservation of both opt-in and opt-out class actions, court supervision and approval of settlements and discontinuances, and mechanisms to deal with concurrent or competing classes. It is currently expected that policy work to advance these reforms will commence in 2023.
As the liability landscape for directors in Aotearoa New Zealand continues to evolve and increase in complexity, Boards are increasingly focused on ensuring their D&O insurance programmes are appropriately tailored to cover their particular risks. Whereas some Boards may in the past have succumbed to the temptation to leave the placement of D&O insurance to management, directors now – more and more – want to understand the interplay between the indemnification they have from the company and their protections under the D&O policy (as well as the company's other liability covers), the detail in the endorsements and exclusions to the D&O programme, and the practical realities of managing the defence of claims in conjunction with their insurer.
In these discussions, a number of common themes and key legal considerations emerge. While the extent to which these matters can be addressed will necessarily be dependent on market conditions and the attitudes and underwriting appetites of insurers, Boards would be well advised to turn their minds to these matters (amongst others) and discuss them with their insurance brokers where appropriate.
Claims by the company and/or major shareholders
D&O policies can often exclude cover for claims brought against directors by the company itself or its subsidiaries. The breadth of these exclusions can be varied: some are broad and simply exclude any claim brought by the company; others are more nuanced, for example incorporating write-backs of cover for shareholder derivative claims or liquidator claims. Because, for obvious reasons, directors cannot be indemnified by the company for liability they have to the company, the presence of such exclusions can have potentially serious consequences for directors and leave them out of pocket if they are sued by the company.
D&O policies also often exclude cover for claims brought against directors by "major shareholders". The thresholds can differ across policies, but can be as low as 10%. While the company may be permitted to indemnify the director (if the "major shareholder" is not a related company), that may provide directors with scant comfort where the company is in financial difficulty – perhaps triggering the claim against the director in the first place – and/or the board dynamics are such that there are practical hurdles to extracting indemnification from the company.
The personal liability risks for directors in an insolvency context have been highlighted by the recent proceedings against the former directors of Mainzeal. The litigation has also highlighted the real prospect that, whatever D&O cover might be in place for the benefit of the Board, the available limits may be insufficient to cover the directors' (and any officers') collective liabilities.
A number of important considerations for the D&O cover arise in connection with such scenarios, including:
Whether the D&O policy contains an insolvency exclusion (for example, providing that the insurer is not liable to make payment under the policy "for loss directly caused by, arising out of, attributable to or in any way connected with any insolvency event"). Both the Australian and New Zealand courts have tended to interpret such exclusions relatively narrowly; however ultimately whether cover is excluded will depend on the specific drafting and the nature of the particular claim. Phrases such as "arising from" have been held, generally, to require a less proximate relationship between the insolvency and the particular claim than phrases such as "caused by".
Whether the D&O limits are sufficient. In this regard, it may be prudent to consider the nature of the company's business, what types of claims it might face, and how many directors (and officers) may need to share the cover.
How any insurance moneys are to be allocated between directors if the limit of liability is insufficient to cover the directors' total collective liability (and costs). Often, D&O policies will permit the insurer to discharge its obligations by paying the funds to the company, leaving the company to distribute the funds amongst insureds. That may be problematic, however, where there is discord amongst the Board (or between the Board and the directors sued) and/or there are no clear principles guiding the appropriate distribution of those funds.
Health and safety cover
New Zealand's health and safety legislation prohibits insurance for health and safety fines. Liability to pay reparations following a health safety event are, however, insurable. Typically, cover for such liabilities would sit under the company's statutory liability policy rather than be a focus of the D&O cover (a number of D&O policies also contain broad exclusions of cover for claims arising out of bodily injury, which could operate to exclude cover for proceedings arising from a health and safety incident). It is important for directors to understand the interplay between these policies and to ensure there is appropriate cover for both the company and directors personally.
Defence costs and defence control rights
A critical component of any D&O policy is the defence costs cover, which funds directors' legal fees and other costs of defending claims brought against them. Because of the statutory charge over insurance moneys that arises under the Insurance Law Reform Act 1936, there remains a need for separate or "ring-fenced" defence costs cover to ensure directors can continue to access defence costs cover pending resolution of a claim (although the insurance contracts law reform is set to repeal and replace this legislation, the timing of this reform remains unclear). Setting an appropriate limit for such separate cover, however, is far from a science. Relevant considerations are likely to include the nature of the company's business, what types of claims it might face, and how many directors (and officers) may need to share the defence costs cover.
Relatedly, directors may also wish to scrutinise the extent of the insurer's defence control rights under the D&O policy. While some D&O policies allow directors to appoint their own legal counsel (with insurer approval) and simply require the insurer to be permitted to "associate" in the defence of the claim, other policies allow the insurer to step in and control the defence of the claim, including the right to appoint legal counsel. Given claims against directors could have significant personal reputational (as well as financial) repercussions, directors need to be comfortable with the practical realities of defending claims covered by their D&O policies.
As Boards' understanding of their legal and practical exposures continues to evolve and mature, so too should their focus on and interrogation of their D&O cover. Reach out to one of our experts below if you'd like to discuss any of the themes covered in this article.
This article is intended only to provide a summary of the subject covered. It does not purport to be comprehensive or to provide legal advice. No person should act in reliance on any statement contained in this publication without first obtaining specific professional advice. If you require any advice or further information on the subject matter of this newsletter, please contact the partner/solicitor in the firm who normally advises you, or alternatively contact one of the partners listed below.