How to protect your company directors from litigation

How to protect your company directors from litigation

The economic uncertainty brought about by the COVID-19 pandemic has already seen many well-known businesses close their doors due to insolvency. Unfortunately, these businesses often leave a flood of debt in their wake with litigators and creditors lining up to be paid.

Whilst it’s important to ensure that all employees are protected during these difficult times, company directors must also address their own level of protection. That’s because when a business goes into insolvency, the personal and family assets of the company’s directors can be accessed during the liquidation process. This can lead to significant financial stress and bankruptcy for unprotected company directors.

There are two main avenues for protecting the assets of company directors, senior staff and business owners, as follows.

1. Legal protection for company directors

Directors can be found personally responsible for their company’s debts and liabilities if they are found to have acted unlawfully. These breaches can include trading while insolvent, personally guaranteeing a company loan, and fraudulent trading. However, if the insolvency is not due to any wrongdoing on behalf of the directors, but to loss of revenue (as occurred recently due to the pandemic), their assets can still be accessed to pay debts.

Unless of course, the company directors have protected their assets against such an eventuality. Asset protection for directors should be considered a key component of their salary package, ensuring that the family home for example, is not threatened during the insolvency process. Some avenues that can be utilised by company directors to protect their assets include holding all assets in a trust or a self-managed superannuation fund. Other strategies include transferring assets into their spouse’s name, establishing testamentary trusts as part of estate planning, and death benefit nominations for superannuation payouts. Company directors should ensure they take professional advice when considering any of these strategies.

2. Insurance protection for company directors

Directors and Officers Liability Insurance is designed to protect the assets of senior management in large multi-nationals, but it’s also applicable to SMEs. It’s designed specifically for business owners and managers or directors who run companies, because they are personally responsible for their decisions and actions within the business. In cases of insolvency, they can protect the assets of senior management against liquidators, if they have behaved appropriately and not abused their director’s duties.

This type of insurance can also protect senior management against unproven criminal charges that require a court defence, as well as lawyers and investigators. Legal costs for both past and present officers, as well as compensation or penalties that may result from a claim can all be covered under this type of insurance. Apart from liabilities and debts due to insolvency, other claims that can be covered include breach of contract, overstepping of director’s authority, legal non-compliance, misrepresentation, and so on. With many decisions made frequently every day by senior officers of a company, suitable insurance protection is vital.

Whilst SMEs can cover their senior staff with a Directors & Officers Liability Insurance, they also have the option of Management Liability Insurance, as this is designed specifically for smaller businesses. To decide what type of insurance policies are suitable to protect your senior staff, talk to an insurance specialist today and find your local adviser.

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.

Directors & Officers/Management Liability Insurance

Many small and medium-sized business owners think they don’t need Directors & Officers (D&O) Insurance as it’s only relevant to large multi-national companies. However, D&O insurance is just as important to SME’s as any other business.

Directors & Officers/Management Liability Insurance

What is Directors & Officers/ Management Liability Insurance?

There are hundreds of laws and regulations in states and territories that directors and officers must comply with when managing or operating a business, including OH&S, workplace risk, Corporations Laws, ASIC, and environmental laws.

D&O (large companies) and Management Liability (SMEs) insurance covers directors, officers and senior managers against actual or alleged acts, errors or omissions arising out of the operation or management of the company. The cover is for personal legal defence costs, as well as paying for any damages awarded for a breach of work-related duties and responsibilities. The policy will also reimburse the company for any legal costs advanced to the director or officer.

Why is D&O Insurance important?

Directors and Officers Insurance not only covers the personal liability of directors, officers and senior managers, but it will also reimburse others for any financial losses they’re incurred due to mismanagement.

Examples of claims include:

wrongful dismissal of an employee
email-related misconduct
breach of contract
OH&S breaches
environmental breaches.

What does D&O Insurance cover?

The main covers provided include:

Managers Liability - covers directors and officers for personal liability arising from claims made against them as a result of their role as managers of the company, where the company is unable or unwilling to pay their defence costs or damages.
Company Liability - provides cover to the company itself for claims made against the company arising from an alleged wrongful act or omission of the company. This is the key difference between Directors and Officers and Management Liability cover for privately owned businesses; otherwise, directors would still have to fund the defence costs for claims against the company out of their own pockets (as the company is treated as a separate legal entity when action is brought).
Employment Practices Liability - provides cover for alleged employment breaches, such as discrimination, harassment, bullying, failure to promote, breach of contract, retaliation and wrongful termination.
Crime – provides protection for your business when there has been a direct financial loss such as theft of money, securities and property. This can include employee fraud or dishonesty, third-party crime, electronic and computer crime, destruction and damage of money.
Statutory Liability (legal defence costs only) - (legal defence costs only) – provides cover for defence costs incurred from any formal investigation by a regulatory/government/professional body or other authorised institution. It also covers any fine or penalty imposed (where legally permitted and subject to policy conditions). The policy can also include a number of extensions, such as cover for legal costs associated with preparing and attending Workplace Health and Safety inquiries, and the accounting costs incurred during a tax audit/investigation.

It’s important to understand the difference between Professional Indemnity and Management Liability Insurance. The easiest way to look at the two insurance covers is that Professional Indemnity covers financial loss incurred by a customer who relies on your professional advice or work. Management Liability, on the other hand, protects your business and the personal assets of management against financial losses, due to allegations or actual mismanagement, misconduct, or legislative breaches.

At Insurance Advisernet, we’ll work with you to understand your business and provide advice on the best way to manage these risks, including the appropriate type and amount of insurance cover.

Frequently Asked Questions

What type of D&O or Management Liability insurance should I buy

As it’s a package, you can choose the basic Management & Company Liability section or add on Crime, Employment Practices and Tax Audit covers. It really depends on the size and nature of your business and the level of risk you’re willing to carry. Insurer cover varies – for example, some offer pollution defence costs, while others offer special cover for labour-hire companies. These are some questions to consider when taking out D&O or Management Liability insurance.

Do I need D&O / Management Liability Insurance?

All companies and businesses of any size can benefit from this insurance cover. Both small and large companies have exposure to employment practices, claims, crime and investigations. As a key premium rating factor is based on size and revenue/ turnover, the premiums are smaller for SMEs than for large companies.

Is D&O / Management Liability Insurance the same as Professional Indemnity Insurance – No, it isn’t.

No, Professional indemnity and Management Liability insurance cover different risks. Professional Indemnity covers financial loss allegedly or actually incurred by a customer who relies on your professional advice or work. Management Liability, on the other hand, protects your business and the personal assets of management against financial losses, due to allegations or actual mismanagement or misconduct that cause a financial loss to the company or shareholders.