Director’s insurance – do I need it?

By Vivian Michael | Company

Directors insurance - do I need it?

Photo credit:  Guy Stevens, Unsplash

Directors and officers insurance can help you manage risk, whatever your business.

It's a good idea to discuss insurance decisions with any cofounders and advisors. 

While some businesses may decide to opt in, for other businesses, if it's a contract requirement, they may not have a choice.

For example, some shareholder agreements  have a clause requiring directors to take out directors insurance. 

Below is a sample clause from a shareholder's agreement requiring directors to have insurance.

Directors’ and officers’ insurance 

The Company must, to the extent permitted by law, take out and maintain at all times directors and officers liability insurance cover for the benefit of all Directors on terms (including that the relevant Director is named as a beneficiary) and with an insurer approved by the Board acting reasonably.


To the extent permitted by law, the Company will indemnify each of the Directors against all claims, demands, costs, losses, damages and liabilities (of whatever nature) in any way incurred by a Director:

  • in the Director's capacity as a director; and/or
  • in connection with the lawful exercise of all or any of the Directors' powers and authorities conferred upon them,

provided that such indemnification will be enforceable even if the relevant Director has been or is entitled to be reimbursed or indemnified by his appointer.


What is directors & officers insurance and do you need it?

Directors insurance covers management level employees, and protects against claims made from the outcomes of their decisions or practices.

Some insurance policies can protect company directors, officers and the company as a whole.

What directors and officers insurance typically covers 

Directors and officers insurance can cover:

  • Employment practices; and
  • HR problems; and
  • Unauthorised decisions; and
  • Reporting errors.

Below we'll look at what happens if there is a misconduct situation.

Misconduct

Per section 199B of the Corporations Act, a company must not pay or agree to insure a person against liability for:

  • a wilful breach of duty in relation to the company; or 
  • a breach of these sections of the Corporations Act - section 182 (use of position) or section 183 (use of information).

Importantly, section 199B applies to prevent a company from either making the payment for the premium directly or through another entity.

What insurance won’t cover

Some insurers won’t cover:

  • Poor corporate governance
  • Fraud
  • Financially distressed companies
  • Crime
  • Overseas domiciled policyholders
  • Breach of professional duty or professional dut or professional services
  • Illegal remuneration
  • Claims covered by another insurance policy
  • Trade practices
  • Prospectus liability and securities

Recap

Importantly, discuss your insurance decision with any other cofounder and also check if directors insurance is a contract requirement. Do you know the cover you need? Check policy coverage and get advice if you need it.

Do you think it's important to have directors insurance?





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About the Author

Vivian Michael is a lawyer and founder of Michael Law Group. Vivian's mission is to make quality business legal services accessible to Australian businesses that would otherwise DIY, rely on legacy contracts or go without.

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