Policyholders should ensure that there is no gap in their D&O cover by making broad and informed notifications of circumstances, in light of the Royal Commission’s findings.
The findings in the Banking Royal Commission’s interim report released on 28 September 2018, and hearings to date, identifies conduct by many financial services entities that may amount to a breach of the law. Financial services entities are likely to look to their professional indemnity and D&O insurers for cover for any third party proceedings or regulatory investigations that follow.
In addition to the numerous AMP shareholder class actions that were commenced after round two of the hearings, a class action has been initiated against mortgage lenders and brokers, for mortgage miss-selling and irresponsible lending. While this was already on foot before the Royal Commission commenced, it is likely to draw heavily on its findings. More may follow. A more interventionist ASIC also seems inevitable, following the criticism of ASIC by Commissioner Hayne in the interim report, for infrequently pursuing financial institutions in Court, and following the recently announced funding boost.
So, how have insurers responded?
D&O insurers are already operating in a loss-making hard market that has driven significant increases to premiums in the last few years. An increase in claims following the Royal Commission will only exacerbate this trend.
Insurers have sought to contain their losses within current policy years via the introduction of Royal Commission exclusion clauses into newly incepted policies.
Careful attention should be given to the wording of these clauses.
A clause that seeks to exclude all claims that ‘arise from’ the Commission and/or its findings may have a narrow effect, depending on the circumstances of the claim. This is because the matters aired before the Commission are pre-existing circumstances, many of which were already the subject of breach reports to ASIC or current ASIC investigations. Further, the Commission is not a Court and does not make any findings of misconduct. It can only make findings that certain conduct might have amounted to misconduct and then refer it to the appropriate government agency to investigate and decide whether to bring proceedings.
On the other hand, exclusion clauses that are worded broadly to exclude, for example, future claims arising out of, or connected with, the terms of reference of the Royal Commission, may have a much more far-reaching effect. The result may be that newly incepted policies containing such clauses may not respond to the types of exposures which are traditionally the very reason these policies are taken out.
So how should policyholders deal with these exclusion clauses, if they cannot be resisted?
Policyholders should ensure that there is no gap in existing coverage by making broad and informed notifications of circumstances under expiring policies. The current state of the law is that broad notifications of circumstances can be effective, although they should have regard to each individual policyholder’s particular exposures based on the Commission’s areas of focus. The wording of the notification should be informed by the breadth of the exclusion clause. It will also be important for policyholders and brokers to be able to explain to insurers why there is a potential for claim to be made, particularly in circumstances where the policyholder was not directly involved in the hearings but operates in the same industry.