Company Directors earn a good living, but this must also be countered with the increase in responsibility, stress and liabilities that comes with such lofty positions. The ride isn’t always rough however, as there can be long stretches of company growth and smooth sailing, but what happens when something goes wrong?
As we all can appreciate, when everything is running smoothly, you can pat yourself on the back and enjoy the good times, even though you worked hard to achieve this outcome. The problem is that there can also be times when the tide turns against you and someone has to pay the piper – but who pays?
Company Directors can be liable for compensation
According to the Corporations Act 2001, Directors of Australian Companies have a number of obligations, responsibilities and duties that must be upheld. In cases where a Company Director is seen to be in breach of these responsibilities, you can be held liable for compensation to the aggrieved parties, and be forced to pay a fine and all legal costs.
The Australian Institute of Company Directors offers a very persuasive argument for personal liability insurance and presents four sound strategies for doing so. The first strategy is based on a risk averse stance, where you simply don’t take a position that exceeds your level of acceptable risk.
The second strategy involves taking advantage of indemnities provided by your company to senior employees. In this instance, you need to ensure that due diligence is observed and you can do this by obtaining legal advice as to the suitability of these indemnities and the limits of compensation they provide.
The third strategy for protecting yourself against litigation is to transfer your personal liability to an insurer, via a D&O insurance policy (Directors & Officers insurance). As with the indemnity cover provided by your employer, you will need to ensure that the limits of compensation from the insurer are sufficient to cover any potential litigation claims.
The final strategy is to recognise that in some cases, company indemnities and D&O insurances may not cover all that is required to pay the resulting fines, legal costs and compensation payouts. In this instance, it is important to obtain financial advice to ensure that your personal assets are managed appropriately.
Is all this really necessary?
If you are wondering whether a D&O insurance policy is really necessary, then a recent study in 2016 by Professor Vince Morabito from the Monash Business School might shed some further light on the issue. In his study, Professor Morabito found that on average, there has been a doubling in class actions by commercial litigation funders in the six years up to 2016, compared to the previous six years (49.5% vs 23.4% respectively).
Another interesting fact from the study is that over the 12 years prior to 2016, more than 50% of all class actions in Australia were brought by investors and shareholders, knocking product liability cases from the top slot.
Clearly, class action and commercial litigation cases are now an established part of the Australian landscape, unfortunately Company Directors are firmly planted in the firing line. As a Company Director, this fact more than any other reasoning, indicates the importance of covering yourself against personal liability, safeguarding your own assets for your family.
This rise in class actions across Australia has even led to calls for legislative reforms to widen the existing protection given to Company Directors in Australia, currently offered by the Corporations Act 2001.
All of this means that Company Directors need to ensure that they have adequate insurance cover against any potential class actions that could result in their assets being seized to pay fines, compensation and legal costs to the aggrieved parties.
General Advice Warning: The information provided is to be regarded as general advice. Whilst we may have collected risk information, your personal objectives, needs or financial situations were not taken into account when preparing this information. We recommend that you consider the suitability of this general advice, in respect of your objectives, financial situation and needs before acting on it. You should obtain and consider the relevant product disclosure statement before making any decision to purchase this financial product.