Personal risks facing board members of Australian companies



John Colvin, CEO and managing director of the Australian Institute of Company Directors, moderates a discussion focusing on the personal risks that face board members of Australian companies between Rehana Box at Blake Dawson, Michael Pryce at Chartis, and Stuart Davies at Gallagher Australia.

Colvin: In addition to the Corporations Act and other Commonwealth statutes, there are more than 700 State or Territory statutes that hold directors liable for breaches of the corporation, in many cases even when they have no personal involvement in those breaches. Can you tell us about some of the specific legal and regulatory changes in Australia which affect the personal risks to D&Os?

Davies: One legislative change which stands out at present is the implementation of the national OH&S laws in all states and territories throughout Australia. With effect from 1 January 2012, all states and territories have agreed to enact new, nationally consistent workplace health and safety laws. These changes now mean that directors and officers have firm duties to ensure their organisations comply with the obligations of the new health and safety laws in all states and reliance upon management to ensure compliance is not enough. Although the new law is very much still in its infancy, and therefore no known matters are in the public arena at present, the new laws do now expose directors and officers to possible liability resulting from a technical breach rather than where an incident or accident has actually occurred. Potential fines of up to $600,000 per individual or up to 5 years imprisonment may result in directors and officers reviewing their practices and undertaking additional training to ensure they meet the new requirements. Another topical issue for directors & officers at present relates to a recent decision in the Auckland High Court, Steigrad v BFSL 2007 Ltd – the Bridgecorp case – whereby it was ruled that a statutory charge be imposed on the D&O policy of Bridgecorp directors by virtue of secton 9 of the Law Reform Act 1936 (NZ). This in effect prevented the insurer from advancing directors defence costs. The civil claim was brought by the receivers against those directors for an amount greater than the combined defence costs and civil liability cover provided by the policy.

Pryce: Indeed, whilst directors face a plethora of legislation in Australia, new legislation has been relatively minimal.. Curiously we are seeing issues arise out of the more innovative reading of neglected legislation. One particular case being in New Zealand against the directors of Bridgecorp. In this case, the court found under Section 9, Law Reform Act 1936, that the proceeds of the D&O insurance that they purchased could not be used to meet the legal costs to defend the directors in the Bridgecorp claim. There is scope for an Australian court to come to a similar conclusion in New South Wales (NSW) (Section 6, Law Reform (Miscellaneous Provisions) Act, 1946), the Australian Capital Territory (ACT), and the Northern Territory. As in New Zealand, statutes in these Australian jurisdictions place a charge over the policy thus preventing the D&Os from accessing the defence costs. If D&O insurance is unable to fund an adequate defence of D&Os, this means that directors will have to fund the defence of any claim themselves, whether legitimate or spurious. Given the complexity of the matters involved and that the expense of a defence that can run into millions of dollars, it may well mean that executives will be shy in taking board positions. However, insurance is now available to provide interim defence cost protection to directors. Though directors should be mindful to ensure that the same carrier provides the defence and loss covers.

Box: Last month the Commonwealth government released the first tranche of long awaited proposed reforms to directors' liability laws. State and territory governments are yet to release any draft legislation. Accordingly it is premature to comment on the specific legal and regulatory changes ahead. The purpose of the reforms, once introduced, will be to implement a consistent approach to the imposition of criminal liability for corporate fault across all Australian jurisdictions. The principles upon which the reforms will be based seek to confine personal criminal liability of D&Os for corporate misconduct to situations where there are compelling public policy reasons for doing so, the liability of the corporation alone is not likely to sufficiently promote compliance and it is reasonable for the director to be liable in all the circumstances. Such circumstances would include where a director or officer has assisted in the commission of an offence or has been negligent or reckless in relation to an offence committed by the company. 

Colvin: What kinds of prosecutions, settlements and penalties have you seen imposed upon D&Os in Australia? Are there any particular aspects of Centro, James Hardie or other cases worth highlighting?

Pryce: The Australian Securities & Investment Commission (ASIC) continues to be aggressive in its pursuit of D&Os. Since 2002-03, the number of public complaints received and reviewed has increased by 44 percent, according to ASIC. ASIC has had supervision of the Australian Stock Exchange since August 2010, and is using this expanded remit to pursue D&Os. As an example, ASIC pursued the directors of Centro for incorrectly classifying debt as non-current, when in actual fact it was current. In the case, the judge found that the directors were “intelligent, experienced and conscientious people”, and went so far as to query the vigour with which ASIC pursued the directors. While the judge was sympathetic in the case and awarded a single fine of $30,000, the legal costs that directors would have likely incurred were in the many millions of dollars.

Box: The recent cases involving Centro, Fortescue Metals, and James Hardie highlight the importance of accurate and timely market disclosure.  They demonstrate that companies, directors, and officers may face civil penalty proceedings for breaches of the continuous disclosure obligations, misleading and deceptive conduct and the duty of care and diligence if the disclosure is defective. As a consequence, they may be liable for pecuniary penalties and banning orders in addition to damages by way of compensation. The James Hardie and Fortescue Metals cases are currently on appeal to the High Court and so the final lessons from those cases are unknown. 

Davies: The trend of non disclosure claims continues to be the major contributor of claims activity against directors. High profile cases such as James Hardie, Centro, Sons of Gwalia, Multiplex, Fortescue Metals and Aristocrat Leisure, but to name a few, have only demonstrated the increased responsibility upon directors and officers to ensure that they not only understand and have the ability to digest, understand and challenge financial documents but also are conscious of releasing statements to the market as soon as they are deemed to be relevant to investors. The Centro case is particularly worth noting as it confirmed that directors are reasonably entitled to rely upon and hold sufficient trust in management and outside advisors – such as the auditors – with regards to their advice, however, this decision has raised the question of at which point does reliance cease to be reasonable and is that when a director is aware of circumstances which would cause a prudent person to question what he or she is being told. What is definitely not in question is that directors are now faced with an increased burden to undertake their own due diligence and not just believe what management tells them.

Colvin: In addition to regulatory proceedings, we have also seen a rise in related litigation such as shareholder class actions in the last 10 years. What types of claims are being brought against D&Os in this context?

Box: There has been an increase in the number of class actions alleging breaches of continuous disclosure and misleading and deceptive conduct provisions of the Corporations Act.  Many of these cases concern inaccurate earnings guidance or improper accounting. Examples include Aristocrat Leisure – non-disclosure and accounting misstatement of losses on termination of two major purchase contracts; AWB – inadequate disclosure in relation to oil-for-food payments; Multiplex – non-disclosure over project cost overruns on the Wembley Stadium redevelopment; and OzMinerals – non-disclosure of refinancing risks. In the majority of these cases, D&Os have not been joined to the proceedings. Litigation funders and plaintiff lawyers may consider that such actions can be run more effectively against one defendant –the company – rather than multiple defendants who may have divergent interests and separate legal representation. The exception is Centro where a number of directors and the CFO have been joined to the class action proceedings to be heard in March 2012. 

Davies: Shareholder class actions continue to trend upwards supported by the active litigation funding industry within Australia. According to its website, one of the leading litigation funding companies within Australia had an investment portfolio consisting of 27 cases with a possible claim value totalling in excess of $1.6bn as of 31 December 2011. The same litigation funder recently announced a result to the market of 27 percent increase in its portfolio. Although many cases are settled out of the public eye and therefore details as to the settlements are often not disclosed, common drivers behind the actions range from breach of continuous disclosure provisions as well as breaches of various commonwealth statutes such as The Corporations Act 2001.

Pryce: Following the global financial crisis, litigation appears to have been relatively consistent, except for what has become the standard bearer within Australia – class actions brought against the entity in respect of securities actions. Whilst boards of publicly traded companies have significantly improved disclosure practices, the number of class actions and the potential severity of them remains an issue. Whilst these actions are brought against the entity, they are time consuming for the directors and costly to defend for director and entity alike. We have seen cases where replacement boards have been introduced due to the time factors involved. As mentioned, the Bridgecorp case in New Zealand is creating potentially unique situations but these have not yet resulted in any issues in Australia, nor a rise in litigation in New Zealand. However, it does raise awareness of directors’ duties and the need for adequate defence costs insurance cover.

Colvin: Given the potential costs associated with defending claims against D&Os, are you seeing an increased take-up in D&O liability insurance in Australia? How effective is this insurance cover?

Davies: Most certainly. With the continued soft market conditions and evolution of management liability products within the market, focused on small private companies, there has been an increase in the buyers of directors and officers insurance. Most notable however, is the increase in limits and ancillary products being purchased by companies. With the attraction of continued low rates on directors and officers insurance, company boards are still reviewing their levels of cover on an annual basis and are often taking the opportunity to purchase some additional capacity where possible.

With the growth in securities class actions made against companies, which has raised the concern of potential limit erosion on policies for individuals, as well as the recent Bridgecorp decision from New Zealand, the most notable trend we are seeing is the interest in ancillary products such as side A cover – Individual cover only – and contingent costs and expenses policies. We envisage this trend will continue throughout 2012.

Pryce: Directors of publicly traded companies are all very aware of their needs for D&O insurance as evidenced by the high uptake of D&O Insurance within the ASX 200. Outside of the publicly traded companies, D&O claims in general are limited. As a result D&O insurance is generally sold as a management liability product and includes crime and employment practice liability covers. For non-publicly traded companies, this is where we actually tend to see most claims, hence the packaging of D&O insurance with these other covers. We believe approximately 80-85 percent of privately owned companies purchase little to no D&O insurance cover. Through the use of technology, we are starting to see an uptake in D&O insurance. As a result, purchasers need to carefully assess the D&O product purchased.

Box: The take up of D&O insurance, and limits purchased, has increased over the last decade. High profile cases, such as James Hardie, have increased the awareness of directors to the risk of personal liabilities.  In particular, boards are seeking much more information regarding their cover and the limits of indemnity maintained for their benefit.  In addition, directors are questioning whether to include additional covers which are of no benefit to them – such as, entity cover for securities claims or ‘Side C’ cover, as it is often called – but which could erode the limit of indemnity. Recently there has been a focus on the availability of defence costs cover following the decision of the New Zealand High Court in Steigrad v BFSL 2007 Limited.  This case involved an application by certain former directors of the collapsed Bridgecorp group of companies who were seeking an advancement of their defence costs under their D&O policy.  The Court held that a statutory charge, similar in terms to statutory charge on the statute books in NSW, ACT and NT, precluded the D&O insurer from advancing defence costs to the insured directors.  As result many companies are buying additional ‘defence costs only’ for their directors cover. D&O insurance is not a panacea.  It does not cover all claims which are or could be brought against corporate directors in Australia, such as, claims by major shareholders.  D&O insurance is however an enormously valuable risk mitigant.

Colvin: What advice would you give to D&Os on selecting a policy that is appropriate for both the individual and the company? How important is it to properly assess the terms, coverage and pricing of available policies?

Pryce: There are three areas to which we believe a client should give serious consideration: what they want from the policy; the terms and conditions of the policy wording; and the insurer’s ability to handle what may become a complex claim. First, directors need to consider their own attitude to the policy and to their business risk management. Directors need to take an active interest in the policy and not delegate the task of purchasing the insurance. They should also consider whether the company’s risk management philosophy tracks through to the boardroom. Second, what cover do the D&Os need? Do they only require cover for them personally or do they also want to purchase the entity cover? The quality of the cover is equally as important. Insurance companies with long track records in product development generally demonstrate a stronger understanding of the issues facing D&Os. Finally there is the claims service. Why does a director buy a D&O policy? The true value is only shown by the quality of the claims service received in the event of a claim. The experience of the claims team, how they engage with the D&Os and the support provided should all be considered. In our experience, you pay for what you get.

Box: The devil is in the details with D&O insurance.  Careful review and consideration of the terms of cover is critical to ensuring the D&O policy provides the protection expected by corporate directors. While every board and company will have a unique risk profile and risk appetite to which D&O insurance needs to be tailored, there are some general coverage terms which are particularly important, including: limiting, or removing, Side C cover to ensure that the limit of liability is not roded, or exhausted by claims against the corporation thereby leaving the individual directors uninsured; increasing the Side A only cover over and above the traditional combined Side A and Side B covers, to ensure that there is cover for the personal assets of directors in the event of non-indemnified claims against them; seeking to ensure that regulatory investigations are covered even where there is no immediate allegation of wrongdoing against an individual director; ensuring full severability of the conduct exclusions and disclosure obligations as between each insured person and, the insured persons and the corporation; ensuring that limits of indemnity are adequate, particularly where there are risks of multiple proceedings and defendants, often requiring separate legal representation; the right to choose defence counsel and be covered for the full costs of doing so; and cover for pecuniary penalties, to the extent permissible by law.

Davies: D&O policies have continued to broaden in their scope of coverage branching out to provide more non-core risk cover to individuals as well as provide a number of company risks. In a continued ‘soft’ market insurers are more often seeking to differentiate on coverage and service as pricing has reached levels which are already considered by many to be unrealistic and unsustainable. Although broader coverage is a benefit to both individuals and companies there are hidden threats to both parties that need to be considered such as limit erosion and conflict of terms. D&O policies need to be tailored to a buyers need and a careful determination of policy terms and conditions, as well as consideration and benchmarking of policy limits, needs to be undertaken to enable buyers to make an informed decision. The decision to purchase Side C cover for example is not an easy one given that doing so has the potential to put at risk individual’s limits, whereas to not purchase Side C, particularly as a public listed entity, has the potential to expose the company balance sheet to a growing claims trend and consequently potentially be detrimental to the shareholder interests.

Colvin: If regulation continues to increase the personal liability risk for directors, what impact (if any) do you think this will have on boards, individual directors and the economy?

Box: Although directors are naturally concerned about personal liability risk, recent high profile cases need to be seen in context. The circumstances giving rise to the James Hardie and Centro cases were exceptional and, while they have brought into sharper focus a number of key matters for directors, they have not in our view raised the bar. Accordingly we do not believe that the risk of personal liability will operate as a significant deterrent to directors joining boards. 

Davies: It is fair to suggest that boards are already challenged in trying to attract high profile directors as a result of increased exposure for directors to potential liability both criminal and civil. Furthermore, with recent decisions relating to the ‘two strike rule’ on board remuneration, the regulatory landscape only reinforces the need for companies to ensure they have in place a robust D&O program which offers both the comfort and protection necessary to attract key directors and senior management to their organisation. A board needs to carefully consider its role in sourcing adequate protection to both the company as well as the individuals involved in the management of the business.  

Pryce: D&Os are dealing with an ever more complex environment: whilst the number of new laws being introduced are relatively limited , we are seeing increasingly innovative approaches to how the existing body of law is used and interpreted as evidenced by Bridgecorp. There has also been an attempt to harmonise the state based Occupational Health and Safety laws, which impose liability on not only the company but upon D&Os. However, the implementation has been difficult, with some Australian states and territories having enacted the legislation and others having deferred the implementation for further review. The result is that while many D&Os have made sure that they are compliant with the new laws, there remains a need for them to maintain ‘dual’ compliance programs until the implementation is complete, which may not occur for at least another year, hardly making life easy for a director. We have also seen the evolving issue around the Bridgecorp case in New Zealand and the dated, equivalent legislation that this has brought to the fore in Australia. Between Bridgecorp and the class action environment, we have seen directors taking significant interest in their D&O policies. There is no doubt that the class action environment in Australia has led to risk management becoming a function of the boardroom as much as any other facet of the business.


John Colvin is the CEO and managing director of the Australian Institute of Company Directors. He is chairman at Can Assist, Director of Colvin Wines Pty Ltd., an former director of Sydney Water and a former chairman of AWT. Mr Colvis was previously head of the Sydney office of Freehills and the founding partner of Freehills’ Sydney Employee Relations practice. During his 31 years with the firm, he worked with chairmen, boards and executives on a variety of employee relations issues, including in the area of corporate governance. He can be contacted on +61 (2) 8248 6600 or by email:

Rehana Box is a partner at Blake Dawson in Sydney. She specialises in insurance advisory and retail financial services. Ms Box is a leading advisor on insurance in Australia to both the insurance industry and the public and private sectors generally. She is a recognised specialist on D&O liability insurances and indemnities and a leading commentator in this area. Ms Box regularly advises the insurance industry on establishing Australian operations, strategic relationships, mergers and acquisitions, IPOs, portfolio transfers, regulatory compliance, reinsurance, captives, and product development. She can be contacted on +61 2 9258 6407 or by email:

Michael Pryce is regional manager, Financial Lines, at Chartis, based in Australia. With over 25 years experience in Financial Lines including directors’ & officers’, employment practices liability, mergers & acquisitions and professional indemnity insurance for both commercial and financial Institutions. Mr Pryce’s global experience includes time in London, New York, and Auckland. As a broker, reinsurer and insurer, he has seen many of the worlds more complex risks from diversified viewpoints. He can be contacted on +61 2 9240 1730 or by email:

Stuart Davies is the national practice leader for Professional and Financial Risks at Gallagher Australia. He has over 16 years industry experience working as both an underwriter and broker in the UK and Australian markets. He specialises in designing and advising clients on professional and financial risk classes of insurance. Throughout his career Mr Davies has been heavily involved in advising a diverse range of clients including large legal firms, major engineering companies, asset managers, private equity fund managers and numerous FTSE 100 and ASX 200 companies. Mr Davies can be contacted on +612 9242 2065 or by email:

© Financier Worldwide



John Colvin

Australian Institute of Company Directors 


Rehana Box

Blake Dawson 


Michael Pryce



Stuart Davies

Gallagher Australia

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