Directors and officers liability insurance and professional indemnity insurance both need careful tailoring to be right for in-house counsel.
In-house counsel are often more exposed to personal liability than they realise. However, they can manage the risk through personal liability insurance. It is important though to select the terms of cover most appropriate to your role and responsibilities. This article outlines some of the key types of insurance and issues of which in-house counsel should be aware of, and includes some practical guidance on what to look out for when arranging cover.
What insurance policies should in-house counsel have?
Depending upon the scope of your responsibilities, in-house counsel may need to be covered by both directors and officers (D&O) liability insurance and professional indemnity (PI) insurance; both of which can be purchased individually, or on your behalf by the company you work for. If, although an in-house counsel, the nature of your role is such that you could also be characterised as a company officer in accordance with section 9 of the Corporations Act 2001 (Cth), it is important that you are covered by both D&O and PI insurance. This is because:
- As the decision of Shafron v Australian Securities and Investments Commission  HCA 18 shows, in-house counsel may face liability under the Corporations Act for a failure to exercise care and diligence as a corporate officer, which is distinct from liability incurred in their role as the company’s legal adviser.
- PI insurance only responds to liabilities incurred in a professional capacity, ie. that of a lawyer, and excludes those incurred in a corporate governance or managerial role.
- D&O insurance excludes liabilities incurred in a professional capacity, other than that of a director or officer, although the mere fact that a director brings other professional skills and knowledge to the role will not preclude it from responding.
In determining which of these insurances to claim under, the focus is always upon the actual conduct giving rise to the liability. It is easier, of course, if you can take steps to prevent being deemed an officer of the company you work for. That may not be feasible, however, especially if you also occupy the role of company secretary. It will be impossible if your role involves actual participation in decisions which affect a major part of the company’s business, although the mere fact that the officers may act on your legal advice will not make you one of them.
PI insurance provides coverage for an insured’s civil liabilities incurred in a professional capacity. There are some things in-house counsel should keep in mind when arranging PI insurance:
- PI insurance is a “claims-made” policy, which means that it is only engaged when a claim, as defined in the policy, is made against the insured by a third party. Many claims-made policies, such as PI insurance, also contain a retroactive date which appears in the policy schedule. The effect of this is that there is no coverage for claims relating to breaches of professional duty which occurred before the retroactive date. Accordingly, in order to maximise the potential coverage under a PI policy, it is important to negotiate the earliest possible retroactive date.
- Different policies have different definitions of “claim”. These differences can have significant legal consequences. It is worthwhile ensuring that you have the widest definition possible. A competent insurance broker can negotiate for a wide definition of “claim” on your behalf.
- It is important to know whether or not the PI policy contains what is called a “deeming clause”. A deeming clause, in this context, provides that if during the policy period an insured becomes aware of circumstances that may give rise to a claim and notifies the insurer of them, any claim which subsequently arises from those matters is deemed to have been made during the policy period in which it was notified. The legal effect of this is that if you as an insured become aware of something that may give rise to a claim against you and you fail to notify the insurer of it before the policy expires, the omission can be excused by section 54(1) of the Insurance Contracts Act 1984 (Cth). You can still notify the claim retrospectively and be covered, subject to any prejudice that the insurer may be able to prove it has sustained due to the late notice. In the case of a policy that does not include a deeming clause, you must notify a circumstance during the policy period for the subsequent claim to be covered, and if you fail to do so, regardless of the reason, the statute provides no relief.
PI insurance will almost always include coverage for defence costs. Defence costs can be included as part of the limit of indemnity, or in addition to it. It is obviously beneficial to have a policy where the defence costs are covered in addition to the limit of indemnity, as this provides greater insurance coverage overall. Such cover, equally obviously, is more expensive and usually will be subject to a proportional adjustment clause, effectively limiting the amount of defence costs covered to the same proportion as the policy limit bears to the insured’s total liability, where the latter exceeds the former.
Another element to consider is the policy’s limit of liability and any applicable sub-limits, which should be appropriate to the level of risk involved in the work which you do as an in-house counsel. A capable insurance broker will be able to advise you on appropriate limits.
This class of insurance shares many features with PI, including the claims-made basis of coverage, but responds to liabilities incurred by directors and/or officers of an organisation in their capacity as such. Each policy excludes matters intended to be covered under the other. However, the focus for determining which one responds to a given claim is on the nature of the actual task that gave rise to it, not on the degree of professionalism required. It is important for in-house counsel to maintain both in order to ensure they are covered for the full range of potential liability exposure arising out of their activities for the company.
D&O insurance has become an integral part of corporate risk management. However, there are some things that you should keep in mind when arranging cover:
- D&O insurance can be comprised of “Side A”, “Side B” and “Side C” coverage. Side A insurance covers the liabilities of individual directors and officers; while Side B reimburses the company for financial loss it incurs by indemnifying its directors for their liabilities where it is permitted to do so, under a deed of indemnity or in accordance with the company’s constitution. By contrast, Side C coverage indemnifies the company in respect of its own liabilities. We generally advise against obtaining Side C coverage, as the overall policy limit is aggregate and D&O insurance should be for the benefit of the directors and officers rather than the company. That is not to say that the company should not procure insurance in respect of its own liabilities, merely that it should buy a separate limit of protection rather than draw down against coverage intended for the directors and officers.
- Most D&O policies now contain an order of payments clause, which stipulates the order in which payments are to be made out of policy proceeds where the director and the company both have a right to claim. It is in your interest to make sure that insured persons, such as the directors and officers themselves, rank ahead of the company if the policy contains such a clause.
- Directors and officers are potentially subject to a number of different compensation orders, fines and penalties, both civil and criminal, provided for in various pieces of legislation such as the Corporations Act and the Australian Securities and Investments Commission Act 2001 (Cth). D&O policies include coverage for compensation orders, which are merely a statutory form of damages, and there is no problem with that. However, issues can arise regarding the legality of indemnities against pecuniary penalties and it may eventually be determined that such coverage is unenforceable. Nonetheless, if your D&O policy purports to cover such penalties, there is no reason not to have it and it is for the insurer to raise any issues with coverage, if and when the law is clarified. Be aware, however, if you work for a bank that it will be illegal for the organisation to indemnify or insure against the financial consequences of breaking the proposed Banking Executive Accountability Regime.
As with PI insurance, it is important to make sure that the D&O policy’s limit of liability and any applicable sub-limits are sufficient for the risks you face. In the D&O context, it is especially important to ensure that the cover for defence costs is high enough to cover legal fees if claims are brought against multiple directors and officers, since their interests may not all be aligned and more than one law firm may be required. A competent insurance broker will be able to advise you on appropriate limits.
Key lessons for in-house counsel
Due to the nature of your role as in-house counsel, you are exposed to risk. Luckily, you are able to manage any liability you may face through personal liability insurance. We recommend that in-house counsel:
- Try to avoid characterisation as an officer of the company by:
- confining yourself to giving objective and independent legal advice;
- refraining from participating in major strategic decisions of the company; and
- not accepting the position of company secretary;
- If such avoidance is not feasible, due to the increasing integration of in-house counsel into the business and strategic decision-making processes of companies, ensure you are covered by both D&O and PI insurance. If you can arrange for them both to be underwritten by the same insurer, then that is beneficial, as it reduces the potential for disputes over the characterisation of liabilities and which policy should respond.
- Make sure that your PI policy:
- has the earliest possible retroactive date, if it has one at all, and that it is no later than the date you started with the company;
- has the widest possible definition of “claim”;
- contains a deeming clause;
- covers defence costs in addition to the limit of liability, if possible; and
- has appropriate limits of liability;
- Ensure that your D&O policy:
- also has a deeming clause;
- does not contain Side C coverage;
- has the narrowest possible PI exclusion;
- contains a suitable order of payments clause;
- covers liability for pecuniary penalties, if possible; and
- has appropriate limits of liability.
By having these points in mind when placing your PI and D&O insurance, you will effectively manage the risks you necessarily incur in your role as in-house counsel.
This article was first published in Inhouse Counsel, Vol 22 No 4, August 2018