Protecting Your Personal Assets – What is Directors and Officer’s (D&O) Liability insurance?
Directors and Officers Liability Insurance came into vogue in the 1980s when the concept of the corporate veil diminished and individuals became litigation targets. It has become common practice to sue Directors/Board Members personally in addition to, or as opposed to suing the legal entity (the Company). This can result in putting your personal assets at risk.
D&O Liability Insurance is designed to protect the personal assets of directors and officers. It provides indemnity for any loss arising from a claim as a result of a wrongful act committed in the course of directors performing their duties.
A ‘wrongful act’ can include any actual or alleged breach of duty, breach of trust, neglect, error is misstatement, misleading statement, omission, breach of warranty of authority or other matter claimed against a director and officer while acting in that capacity.
Setting up a corporate entity does not instantly protect Directors from personal liabilities. Directors and Officers have statutory obligations under the Corporation’s Law which include:
Being reasonably careful and diligent
Using information acquired through your office for the company’s benefit
Disclosing any interest in any contracts with the company
Stating whether or not the company profit and loss account and balance sheet give a true and fair view of the company’s position
Reporting on and reviewing the results of the company’s operations during the relevant accounting period and any significant changes in the company’s affairs during that period
Preventing the company from trading while it is insolvent; and
Disclosing any errors or matters warranting disclosure in a prospectus
Director Duties extend to other State/Federal Legislation
Corporate failures in the 1980s and 1990s have contributed to a raft of legislation with heavy fines/penalties/obligations aimed specifically at Directors. This has been a global trend (e.g. Worldcom). Directors are now directly affected by more than 2,000,000 references under federal, state and local government law.
Directors need to ensure the company does not breach the regulations within:
The Trade Practices Act
The Fair Trading Act
Occupational Health and Safety legislation
Disability Discrimination Act 1992 (all property owners have responsibilities in regards to disabled access/evacuation procedures etc)
Legislation that relates to the specific industry in which the company trades
Where are the source of Claims against Directors and Officers?
Regulatory Authorities (ASIC, ACCC, EPA, ATO, Workcover for OH&S)
Employees (Unfair dismissal, discrimination, breaches of employment laws/awards)