The past year has seen a highly competitive landscape continue to exert downward pressure on rates across all policy classes, and Directors’ and Officers’ Liability (D&O) is no exception. Combine these market forces with a number of watershed legal cases on how directors can use their D&O insurance to cover legal defence costs, and it’s been an interesting year all round. Paul Smyth, Placement Director - Financial Services for Aon, reviews the year that’s been and what we can expect from 2014.
It’s fair to say that 2013 has seen increasingly challenging market conditions for insurers. Capital flows from non-traditional sources have continued unabated, and now almost dwarf flows from more traditional sources. This has meant an unprecedented convergence of capital, leading to excess capacity in all policy classes. This may be good news for clients, who have benefited from downward pressure on premiums, but certainly less appealing conditions for insurers. Already dealing with slow economic growth, they have found themselves generally unable to absorb the extra capacity through organic growth from their existing portfolios’.
In the case of D&O liability, the challenging operating environment has led to a pitched battle between the major insurance players. Preferred risk categories have been particularly hard fought over, and some insurers have gone so far as to soften their usually rigid underwriting stance on less attractive risks. In general terms, more and more D&O insurers are revising their policy wording, ‘pushing the envelope’ as it were, and challenging structural aspects of the sector which have remained untouched since D&O liability cover began.
In addition, overseas D&O insurers are increasingly attracted by the oversupply of capital in the Australian market, and are starting to make inroads against their local counterparts. While it is true that many have taken the more cautious step of developing local agency arrangements, it is a measure of the positive outlook for the market generally that others have committed to the costly and time consuming process of establishing their own local licence – a sure sign that major players do not anticipate any reduction in the capital inflows into the D&O sector any time soon.
In other significant events, the Victorian Environmental Protection Authority released clearer guidelines for directors, officers and managers seeking to avoid breaches of environmental legislation and consequent personal liability. The guidelines state that a director, manager or officer of a company will be deemed guilty of breaching the Act if the company commits an offence, and they were in a position to influence the conduct of the organisation, yet did not use due diligence to do so. These guidelines go some way towards providing clarity for directors in terms of their personal responsibility and conduct.
The Great Southern and Bridgecorp cases were decided during 2013, providing comfort and a sigh of relief for insurers, directors and other professionals with respect to the policy conditions and limitations of their D&O insurance.
In the Great Southern case, 20,000 investors caught up in the 2009 collapse of the agribusiness managed investment scheme are claiming they were misled by unrealistic promises contained in the official offer document. At the same time, company directors and executives were forced to seek a ruling from the NSW Court of Appeal as to whether they could claim against their D&O policy to fund their defence costs. The D&O policy provided for defence costs as well as for compensation that the directors might be forced to pay if found guilty. However, the claimants recognised that any defence costs paid under the D&O policy would reduce the amount available to them in the future should the directors be found guilty. The NSW Court of Appeal held that the directors could have recourse to their D&O policy for defence costs.
This position was also taken in another watershed case in New Zealand. In the Bridgecorp case, directors were again accused of misleading investors, and the same question about recourse to the D&O policy for defence costs was raised. The initial decision in the negative was overturned in December 2013 by the New Zealand Court of Appeal, which ruled that directors were not prevented from having recourse to their D&O policy for cover for their defence costs.
While these decisions should allow directors to sleep easier, it is still possible that the Bridgecorp decision will be appealed. It would therefore be prudent for directors and other professionals to ensure that, when reviewing their D&O insurance arrangements, there are separate limits of liability for defence costs and for any ultimate liability to a claimant.
Finally, looking forward to 2014, what can we expect from the D&O sector?
The bottom line is that it will very likely be more of the same. With the economic environment less than stellar, market conditions will in all likelihood remain challenging. History tells us that any slow-down in the economy leads to an increase in company failures and a rise in claims activity. With competition rife in the D&O sector already, it will be interesting to see what the result will be.
For our part, we anticipate continuing robust competition marked by further price flexibility, and broadening of policy coverage across the board.