For when things go wrong: directors and officers insurance and indemnities

June, 2017

By Andrew Egri, Lawyer

 It is clear that officers of not-for-profit organisations contribute a great deal to their cause, often at a personal cost. In addition to their investment of time and energy, officers are also authorised and expected to take risks on behalf of their organisation.

It is good governance to protect those who are exposed, as officers, to risk on the organisation’s behalf. Indeed, many officers will insist upon comprehensive protection by their organisation.

Organisations can bear much of the financial burden should their officers be threatened with legal action through the use of:

1. Indemnities in Constitution

Officers are often indemnified under their organisation’s constitution in respect of personal liability. The constitution may also provide for D&O Insurance. However, officers should review those provisions carefully, as in some cases, the constitution may simply provide that the organisation may, rather than does, indemnify officers. Careful review will also reveal how broad an indemnity is provided.

Officers, however, should be mindful of the limits to the effectiveness of an indemnity in a constitution. Those limitations include that:

2. Deed of Indemnity, Access and Insurance

To provide them with greater protection, officers should require that their organisation enter into a Deed of Indemnity, Access and Insurance with them. The deed sets out the basis for the organisation to indemnify the officers for personal liabilities and associated legal costs which result from their role as an officer.

A Deed of Indemnity, Access and Insurance operates in a comparable manner to the organisation’s constitution. It has, however, a number of advantages, including that it:

  1. requires any amendment to be agreed between the organisation and officer;
  2. may be enforced by both current and former officers; and
  3. may also provide the officer with access to documents and D&O Insurance, during and after the period they hold office.

 2.1 Specific limitations and obligations

2.1.1 Public Companies Limited by Guarantee

Under the Corporations Act 2001 (Cth) and the Competition and Consumer Act 2010 (Cth), a company is prohibited from indemnifying an officer for liabilities:

These limitations are a major reason why D&O Insurance is necessary. Without sufficient coverage, officers are exposed in respect of the liabilities listed above.

2.1.2 Incorporated Associations

Victorian associations are required, under section 87 of the Associations Incorporation Reform Act 2012 (Vic), to indemnify their officers from liability for activities they undertake in good faith on behalf of those associations.

While associations incorporated in other States and Territories are not under the same obligation, in many cases it will still be appropriate to enter into a deed. A small association may determine that the risk is not at a level that requires the protection of a deed in addition to the indemnity contained in its constitution.

2.2 Issues to consider when preparing Deed of Indemnity, Access and Insurance

Not all indemnities are the same and organisations as well as their directors should at least consider the following issues:

3. Insurance

D&O Insurance is an important part of the protection afforded to officers as it addresses the gap in coverage given the various prohibitions on indemnities.

D&O Insurance commonly has three ‘sides’ of coverage:

3.1 Specific limitations

A company is prohibited from paying an insurance premium for an officer’s:

3.2 Issues to consider when selecting D&O Insurance

D&O Insurance policies can differ substantially among providers. When comparing policies, consider the following issues:

4. Summary

In summary, officers need to ensure that they are adequately protected under a variety of mechanisms. Often, this will include a deed of indemnity, access and insurance. Further, not all indemnities are the same and officers should carefully review their coverage and seek legal advice if clarification is required.

 

Contact Mills Oakley

Vera Visevic | Partner
T: +61 2 8289 5812
E: vvisevic@millsoakley.com.au

 

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