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BRISBANE, Australia-Litigation against company directors is increasing, but at the same time, the market for directors and officers liability coverage is soft, says an insurer attorney.
And while that means insurers are offering coverages with broader terms, he warned risk managers to ensure they have "the right cover." Some coverages allow policyholders to choose their own lawyers; others do not. He said some include an insured vs. insured exclusion, and others do not. Such an exclusion means the policy will not cover an action in which one insured director of a company takes action against another insured director in the company.
Speaking at a session on D&O insurance and its relationship to corporate governance last month at the Queensland ARIMA Chapter one-day conference in Brisbane, Simon Alroe, senior associate with Brisbane law firm Minter Ellison, warned against relying on a D&O policy for full protection.
"A directors and officers policy is only one weapon in the risk management armory; you also need things like supplementary legal cover," he said.
Mr. Alroe said even though "there's a lot of people in the market selling D&O," policyholders do not always "get a good deal."
Although shareholder claims against corporations still are rare in Australia, liquidators' claims against directors of a company in liquidation are increasing, and court decisions have shown that liquidators can buy coverage to take action against directors.
In separate Federal Court decisions last year, judges ruled that liquidators could enter into a debt-retrieval agreement with insurers through which the insurer would cover the liquidator's costs to take action against former directors. The insurer would get its costs covered, plus a percentage of the amount recovered.
In the second case, the court endorsed an arrangement where a bank provided funds and an insurer indemnified the bank against losses. Both the bank and the insurer were reimbursed from funds recovered.
Mr. Alroe warned risk managers to check D&O policies carefully. He questioned whether, if a liquidator is taking action on behalf of a company, an insured vs. insured exclusion would operate.
Speaking at a separate seminar, organized by the Queensland chapter of the Australian Insurance Law Assn., Andre Louw, general manager-professional risks in the Sydney office of broker Alexander & Alexander Pty. Ltd., agreed Australia's competitive, soft market for D&O and other professional indemnity lines means too many risk managers are making decisions on price alone.
Mr. Louw told seminar atttendees that the Australian D&O market has seen many new insurer entrants because of an appearance of a low claims rate and a trend among larger policyholders to prefer to place all liability lines with the same insurer or panel of insurers.
Professional indemnity and D&O insurers are engaged in "a classical market share battle," he noted. "Costs have gone down and terms are more favorable," but despite that, too many risk managers still are making price-based decisions.
Mr. Louw said insurers are now offering guaranteed continuity of coverage as a way to retain market share.
He predicted the development of comprehensive, all-inclusive professional liability policies to prevent potential gaps between D&O and other professional indemnity risks.
Already, many D&O wordings expand beyond what a D&O policy is traditionally expected to cover, he noted. Many have extensions of coverage for the corporate entities, even subsidiary polices for entities, and extensions for defense costs as standard clauses.
Mr. Louw said predetermined allocations of coverage are a concept "in its infancy here." Insurers will agree to deem a predetermined percentage of a claim against a company and a director as being covered by D&O.
Mr. Louw said mixed claims are "a nightmare for lawyers, brokers and insurers and courts don't make it any easier." A predetermined allocation of coverage "means companies are being covered for commercial trading liability under D&O. D&O was always meant only to respond to claims against directors, not the company," he noted.