Spot check for directors and officers: indemnity deeds, D&O insurance

By Michael Sheng, Rehana Box, Ashurst
0
1610
LinkedIn
Facebook
Twitter
Whatsapp
Telegram
Copy link

Directors and officers deeds of access, indemnity and insurance, and liability insurances (D&O insurance) provide important protection for companies, and their directors and officers.

盛冕 Michael Sheng 亚司特国际律师事务所 上海代表处 合伙人 Partner Ashurst Shanghai
盛冕
Michael Sheng
亚司特国际律师事务所
上海代表处
合伙人
Partner
Ashurst
Shanghai

What you need to do

  • Periodically review your indemnity deeds and D&O insurance policies to ensure they are in line with current laws, best market practice and afford adequate coverage given the risk profile of the company.
  • Ensure that any limitations to company indemnities and D&O insurance are understood by the company, directors and officers.

Indemnity deeds

An indemnity deed typically:

  • provides a director with contractual rights to be indemnified in respect of costs, expenses and other losses incurred by the director as a consequence of acting as a director, and contractual rights to an advancement of those costs and expenses;
  • imposes an obligation on the company to effect, or use its best endeavours to effect, D&O insurance for the period of the directorship and for a period (usually seven years) after the termination of the directorship; and
  • provides a director with greater access to documents and records of the company than provided for under Australian corporations legislation, even after the director ceases to be a director of the company (including, importantly, rights to access D&O insurance after the director has left the company).
Rehana Box 亚司特国际律师事务所 悉尼办公室 合伙人 Partner Ashurst Sydney
Rehana Box
亚司特国际律师事务所
悉尼办公室
合伙人
Partner
Ashurst
Sydney

An indemnity deed can also protect the company by imposing obligations on the director in relation to conduct of indemnified claims, notification of claims and circumstances, preservation of privilege attaching to documents and so on.

D&O insurance

While the specific terms of D&O insurance policies vary, the insured director or officer is typically insured against their legal liability to pay compensation for wrongdoing committed, or allegedly committed, by them in their capacity as a director or officer, as well as the defence costs incurred in defending a claim brought against them. Where the director or officer is indemnified by the company for that liability, the company is entitled to reimbursement from the insurer pursuant to the policy terms.

Given the complexity of some claims against directors and officers, it is often the case that determining whether the claim is covered by D&O insurance only occurs sometime after the claim is first made. To ensure directors and officers are not required to personally fund their own defence, most D&O insurance policies provide that the insurer will advance defence costs to the insured directors until such time as it can be determined whether the claim is covered by the policy.

Common risks to which companies and their directors and officers may be exposed include:

  • failure to comply with laws and regulatory requirements;
  • regulatory reporting errors;
  • inaccurate or inadequate disclosure (e.g. in company accounts);
  • misrepresentations in a prospectus; and
  • decisions exceeding the authority granted to a company officer.

Deeds and insurance

Directors and officers will in most cases seek indemnity from their company in the first instance, the main exception being where the claim is for a breach of the director’s or officer’s duty to the company itself.

Australian legislation prohibits the granting of an indemnity by a company against certain kinds of liabilities incurred by a director or officer of an Australian company, in their capacity as such, for example:

  • a liability owed to the company itself, or to a related body corporate;
  • a liability for specified pecuniary penalties or compensation orders; or
  • a liability owed to someone else, and that did not arise out of conduct in good faith.

Australian legislation also prohibits the granting of an indemnity by a company to a director or officer for legal costs and expenses incurred in:

  • defending an action for a liability for which the person cannot be indemnified by reason of the abovementioned prohibition;
  • defending or resisting criminal proceedings in which the person is found guilty; or
  • connection with proceedings for relief from liability that the court denies.

Australian corporations legislation does not prohibit an indemnity being given by a person other than the Australian company or one of its related bodies corporate, e.g. an indemnity given by a third-party insurer under a D&O insurance policy.

D&O liability risks in insolvency

The risks for directors and officers of inadequate D&O insurance are heightened where companies are under administration, receivership or liquidation. In these circumstances, any indemnity granted by the company to the director or officer may be of little or no value and the director or officer may be wholly reliant on D&O insurance.

If the D&O insurance coverage is premised on the company indemnifying the director or officer to the fullest extent allowable at law, and the company does not do so (for example, due to the insolvency of the company), the director or officer may be in a situation of having no right to indemnity from the company, or under the D&O insurance.

Other issues

Other issues that companies, directors and officers need to have regard to are issues such as the effectiveness of global insurance programmes in jurisdictions requiring local insurances to be effected, possible gaps in cover in excess layer insurance programmes, cover for fines and penalties, and coverage available to provide additional comfort to directors and officers that they will have access to defence costs cover in view of the recent Bridgecorp decisions in New Zealand (see Ashurst’s update on the Bridgecorp case, dated 20 December 2012).

It is good practice for companies and their directors and officers to periodically review their indemnity deeds and D&O insurance policies to ensure they are in line with current laws, best market practice and afford adequate coverage given the risk profile of the company. It is also important that any limitations to company indemnity deeds and D&O insurance are understood.

download (1)

亚司特国际律师事务所上海代表处

上海市南京西路1168号中信泰富广场3408-10

Ashurst Shanghai office

Suites 3408-10, CITIC Square

1168 Nanjing Road West, Shanghai

邮编 Postal code: 200041

电话 Tel: 86 21 6263 1888

传真 Fax: 86 21 6263 1999

电子信箱 E-mail:

michael.sheng@ashurst.com

rehana.box@ashurst.com

www.ashurst.com

LinkedIn
Facebook
Twitter
Whatsapp
Telegram
Copy link