If you have been giving thought lately to the risks you face as a director or officer you are right to do so – there are unlikely to be many people who have not in present conditions. It is no secret that the legal environment facing directors and officers in New Zealand has never been more challenging: one only has to look at headlines over recent times, e.g. prosecutions, investigations, inquiries, regulatory civil action, not to mention the Steigrad (Bridgecorp) Hight Court and now Supreme Court decisions overturning decades of liability insurance practice and the growth of  compliance requirements to know that things are becoming more complex and that the performance of boards and senior management is under scrutiny here like never before. Consider some of the changes already implemented, afoot or being evaluated in the regulatory space alone:

• financial services sector overhaul;
• revamp of securities law;
• impending and proposed changes to the health and safety regime following on-going concern (focused by high profile deaths in mining, construction and forestry) regarding NZ’s high level of worker fatalities and serious harm incidents. A new regulator (Worksafe) is already with us 
• cartel conduct under the spotlight – potential for criminalisation under new Bill;
• new anti-bribery, corruption and money laundering legislation in force with respect to certain businesses set to widen to include other industries;
• proposed consumer law reform;
• proposed amendments to privacy legislation  - many of which reflect the digital perils businesses now navigate on a daily basis;
• changes to national environmental standards.

Legal action being brought against the former directors of the failed finance companies and certain other well-known corporate failures has captured headlines in the last few years. The presence of litigation funding firms in the New Zealand market working in conjunction with local lawyers also represents a potentially worrying development for New Zealand directors as it signals we may be one step closer to the far more litigious environment that exists in certain other places in the world, including across the Tasman. Whilst our legal system does not yet support the volume and size of class actions that feature in other jurisdictions, these could become more common over time if public attitudes to litigation continue to change, litigation funders raise their profile and the government continues to have a desire to review all manner of aspects of regulation.  

At a time when company directors and officers need to be confident that the liability insurance arranged to respond to their personal liability exposures will work for them if and when they need it, it seems that many directors and officers take only limited comfort from their policies despite being increasingly concerned regarding their personal exposures. 

In a recent survey of New Zealand directors conducted by Marsh in partnership with the Institute of Directors, participants ranked their greatest concerns in terms of personal risk as:

• Reputational Risk;
• Personal liability for a legislative breach;
• Loss of personal assets if found liable.

When it came to Directors and Officers Liability insurance, the underlying concern that came through from respondents in their top four responses was lack of certainty that the insurance cover would assist them if and when they ever needed to call on the insurance. The cost of the cover came in at number five. 

So what can you do to maximise the protection afforded by personal liability policies like Directors and Officers Liability insurance?

1. Check the company constitution for indemnity and insurance provisions.

2. Seek a deed of indemnity from your company and have it reviewed by legal counsel acting on your behalf. 

3. Educate yourself regarding the scope of any insurance covering your exposures, particularly your Directors and Officers Liability policy (including D & O Defence Costs) as this type of policy (often in conjunction with Statutory Liability insurance) is the “core” of your insurance cover for personal liability. Ways to do this include: 

• requesting a copy of the insurance policy/ies that affect you and taking the time to read them;  
• be aware that policies like Directors and Officers Liability insurance can (and often do) provide a mix of balance sheet protection to the company and personal liability cover for insured persons. This makes it very important to understand the structure of your program and where it falls in the spectrum of potential permutations of balance sheet vs individual protection. Suitable Limits of Liability are also critical.
• Seek clarity regarding how the cover will respond when the interests of the corporate insured and natural persons are in conflict. 
• Take particular interest in the pre-renewal procedure for any insurance that is arranged to cover your liability exposures as you have personal obligations of disclosure to potential insurers (whether they are a new insurer or your current one). 
• Be cautious about any proposed change in insurer at renewal that does not highlight any risks associated with the transfer as well as potential positives. 
• Ask your insurance broker to explain what expertise they have in negotiating this kind of contract and if appropriate, have them (not just the underwriters) present to you for a “one on one” explanation of cover. Take the opportunity to ask questions. 
• Pay particular attention to any Steigrad/Bridgecorp solutions (whereby the limit for defence costs has been separated from the limit applicable for third party compensation) to provide certainty of access in the event of a statutory charge. 
• If you have not heard of Bridgecorp/Steigrad and/or do not know how your liability policies might be affected you need to take urgent attention. Failure to have separated defence costs cover in some form could mean that you have no ability to access defence costs cover if the policy has been frozen by a statutory charge.  

4. Understand your obligations under any deed or insurance policy. You will need to comply in order to maximise you entitlement to benefit from them.

5. Regularly review your insurance and deed of indemnity – do it before you need to call on them!

In summary, whilst no director or officer ever plans or hopes to call on a company deed or insurance policy; it has never been more important to take the time to understand their operation, benefits and limitations just in case. Risk and the threat of personal liability from legal action will continue to evolve – your insurance and indemnity arrangements must do the same.

For more information about this topic please contact Marsh at www.marsh.co.nz or call 0800 627 744 and ask to speak with Heidi Axtell or Xavier Marguinaud.

Disclaimer: Statements concerning legal matters should be understood to be general observations based solely on our experience as insurance brokers and risk consultants and should not be relied upon as legal advice, which we are not authorised to provide. All such matters should be reviewed with your own qualified legal advisors. The information contained in this publication is based on sources we believe reliable, but we do not guarantee its accuracy. This information provides only a general overview of the subjects covered. Copyright 2014 Marsh Ltd. All rights reserved.

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