Dear <<First Name>>
Directors & Officers Liability Insurance:
The Companies Act states directors have a personal accountability for their actions & cannot hide from the consequences behind the corporate veil. The Institute of Directors have recently completed a survey nationally with 528 members responding. The first part of the Survey focused on risk issues which affect directors personally. The issue of most concern was ‘reputational risk as an individual.
Directors & Officers (D&O) liability insurance has been a large topic of focus following the rulings in the Steigrad case (perhaps better known as Bridgecorp), over the last two years. The issue most directors have worried about was “the policy not responding in the event of you needing to make a claim”. Given the Supreme Court ruling issued on December 23rd 2013 in the Steigrad proceedings, it is perhaps easy to see why directors may feel uneasy in this regard.
In the case there was a single cap on the D&O policy held by the Directors; the effect of this was any defence costs taken by the Directors in defending the claims against them would reduce the amounts available from the insurance to pay-out for any losses suffered by the investors. The question confronting the Court, given the link to human suffering, was the thought the protection of the claimant with regards insurance money was paramount. However, uncharged claims (such as defence costs) being able to diminish the money available for injured persons, it might be thought, would fit in with this policy aim. Regretfully, the policy wording provided no clarification as to whom had the first call on the policy proceeds.
Directors also had high degrees of concern with not knowing what was in their policy & not having sufficient cover. Regular review of your liability policies is strongly recommended. If cover is arranged through the organisation you are working for, then I suggest requesting a copy of the policy.
Warren Buffett once said; “It takes 20 years to build a reputation & five minutes to ruin it”. In our digital age, & with the advent of social media, this could not be truer. 34% of the respondents said they did NOT have plans or a procedure in place to assist management of reputational risk. Ranked second, was disruption to your business following major incident, such as fire, earthquake, flood or act of terrorism.
Directors should check their organisation has current valuations for its assets to ensure there is sufficient replacement cover should an unfortunate event occur. You also need to review your business interruption policies & indemnity periods. I.T. was also high on the agenda for internal risks with “disruption to your business following a major IT incident” rating as the risk of most concern & “loss of data, data corruption or failure of systems security” rating third.
Directors & Boards should proactively evaluate these risk exposures & ensure risk management procedures are put in place to help protect the entity from cyber-related losses. Having good business interruption insurance in place, with cover for major IT issues such as network outages, will also help to reduce the impact of these types of events.
Succession planning & the loss of a key person was number two in the rankings. The survey respondents said their organisation did NOT have a procedure in place to manage the loss of a key person & did not have any succession planning for CEO or board roles. Specific issues mentioned were the Cook Straight Earthquakes, Bridgecorp case, & the health & safety legislation related to the Pike River enquiry.
Reviewing your insurance on a regular basis is essential – especially as the business environment changes & new risks evolve. Continuous changes in legislation such as the recent health & safety reforms & the Financial Markets Conduct Act have more than likely contributed to the issue of most concern being increasing corporate governance requirements.
My advice is to make sure you understand these regulatory changes & their implications. The prominence of cyber risk again, following my earlier comments around organisational IT risks, reinforces the growing concerns people have around technology risks
Therefore it is important you are aware what insurance you have in place, how it would respond in the event of an incident, & whether your policy limits are adequate. For more information, please feel free to contact me here at the office on 03 548 2211.