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The new Australian Consumer Law is not just a major change in the law, it also brings in new liabilities for directors and officers. Not understanding your new risks, your exposure and whether you have cover under an indemnity or insurance, could prove to be a very expensive mistake.

A director or management can already be disqualified for breaching some parts of the Trade Practices Act, but now under the Australian Consumer Law they can be disqualified for breaching some of the consumer protection provisions. These include unconscionable conduct, false representations in relation to the supply of goods, breach of certain consumer safety provisions, and not complying with the substantiation notice.

This isn't limited to direct contravention either - directors and officers can be held liable if they're involved in someone else's contravention.

Finally, they can also face significant fines if they are knowingly concerned in breaches of the legislation.

As if that wasn't enough to worry about, your company isn't allowed to indemnify you for your legal costs in defending enforcement actions arising from alleged breaches of these consumer protection laws or for any fines you might have to pay if you were found to be liable. So that's the bad news.

The obvious question is, of course, does my D&O insurance cover these breaches? At the moment nothing prevents companies from arranging D&O insurance to cover breaches of the consumer protection provisions, but there are restrictions on what insurance will cover.

The big question is whether the insurance actually does what you think it does. That's because the wording of D&O policies varies and the Australian Consumer Law is creating new statutory liability for directors, so your policy might not cover the offences. Even if it does, it might not do you much good immediately, because many policies do not pay legal costs in advance. On top of that, all policies will only pay reasonable legal costs and what you think is reasonable might not look that way to your insurer.

One solution is for your company to lend you money for your legal costs. This is legal, but any loan would need to be set up very carefully. That's because the Corporations Act restricts the type of loans that can be made to directors and also because you want to make sure that the amount is recoverable under your D&O insurance.

What should directors and officers do before the new laws come into effect on 1 January 2011? You should first review your D&O insurance to see what protections you have in place. Second, you should consider what other arrangements you might need. Third, of course, you should ensure your company is ready for the new laws. The better your compliance, the lower the risk you face in the first place.