Are You Protected? Transferring Risk with D&O Insurance

This article is the second in a series of 4 articles on director protection.  This article focuses on D&O insurance.

An ever increasing number of duties

Directors and officers of Australian companies face an ever increasing number of duties, responsibilities and obligations.  Most directors are aware of their duties under the Corporations Act 2001, including the duty to exercise care and diligence (s 180), the duty to act in good faith in the best interests of the company (s 181) and the duty to prevent insolvent trading (s 588G).  However, there are many other duties.  For example, directors and officers can be held liable for the conduct of the company, or the conduct of an employee of the company, under the Occupational Safety and Health Act 1984 (WA), the Sex Discrimination Act 1984 (Cth) and the Commonwealth taxation legislation.  Directors and officers of Australian companies may be liable to shareholders, creditors, third parties and their own companies.  Given the increasingly onerous duties placed on directors and officers and their vulnerability to claims, the role of D&O insurance is becoming even more important.

Types of D&O policies

There are multiple different types of D&O insurance policies, including corporate and personal policies.  Corporate D&O insurance is purchased by companies to insure their directors and officers.  Personal D&O insurance, on the other hand, is purchased by individual directors for their own exclusive benefit.  The focus of this article is on corporate D&O insurance. 

A typical corporate D&O insurance policy will cover:

  • directors and officers, where the company is unwilling or unable to provide protection; and
  • the company, for those amounts which it is obliged to indemnify its directors and officers (for example, under its constitution or a deed of indemnity).

A typical D&O policy will also contain additional extensions and exclusions.  Directors and officers are advised to consider these extensions and exclusions very carefully.  In our experience, there is often a gap between cover and expectations.  Some examples of this are described below.

Insured versus insured exclusion

Most D&O policies contain a clause which excludes claims brought by one person covered by the policy against another person covered by the policy, e.g. claims brought by the company against a director or officer of the company.  The reason for the exclusion is to prevent related parties from manufacturing claims against each other to obtain damages from the insurer.  This is a significant exclusion, as many directors' duties are owed to the company.  If the company brings a claim against a director for breach of duty (e.g. for failing to act in good faith in the best interests of the company), both the director and the company are unlikely to be covered.  For a higher premium, you may be able to remove this exclusion.

Inquisitorial and investigatory powers extension

A number of government organisations now have the benefit of extensive inquisitorial and investigatory powers (e.g. ASIC, APRA, ACCC etc).  Sometimes, investigations by these organisations can be lengthy and highly intrusive.  The cost of arranging legal representation at an inquiry or the cost of responding to an investigation can also be substantial.  Companies, directors and officers should consider whether or not their D&O insurance covers them for the cost of such inquiries and investigations.

In Intergraph Best (Vic) Pty Ltd v QBE Insurance (Australia) Limited [2004] VSC 433 the company was the subject of an investigation by a Royal Commission amid allegations of improper conduct.  Current and former directors and officers of the company were required to give evidence.  In total, the company incurred more than $5 million in legal costs in connection with the Royal Commission.  The company sought to claim these costs from QBE under its D&O insurance policy.  The relevant policy provided cover: (i) to insured persons in respect of their personal liability; and (ii) to the company in respect of any obligation to indemnify the insured persons.  QBE argued that it was not liable to indemnify the company.  QBE stated that the policy required it to indemnify the company for legal costs incurred by the directors or officers of the company, but not by the company itself.  The Victorian Court of Appeal agreed.  Interestingly, it appears the company would have been covered if it was liable (whether pursuant to its constitution or a deed of indemnity) to indemnify the directors and officers who were required to give evidence in respect of their legal costs. This would occur where the directors and officers had incurred and then sought reimbursement of those costs.

We have acted for a number of AFS licensees as part of inquiries and investigations commenced by ASIC.  It is not unusual for ASIC to issue notices under the Corporations Act 2001 and the ASIC Act 2001 to several officers of a licensee to answer questions or give evidence about the licensee.  These officers are generally permitted to have their own legal representation, and it is usually in the licensee's best interests that they do so.  However, before a licensee agrees to pay its officers' legal expenses, it should consider the terms of its D&O policy.  It may be preferable for the officers to personally incur these expenses and then seek reimbursement from the licensee.  If the licensee pays these expenses directly, it may be unable to recover them under its D&O policy.


  • If you are a director, make sure that you obtain a copy of the whole D&O insurance policy (including the policy wording and the schedule).  Some directors never see the actual D&O insurance policy wording.  It can be extremely disappointing to learn, when a claim is made, that the policy does not respond.  It can also be dangerous to rely upon a summary provided by the company or its insurance broker.
  • Check who is liable to pay any excess, and how much the excess is.  An excess (also known as a deductible) is an amount an insured must contribute towards any claim.  If there is an excess and it is agreed that the company should pay the excess, a provision to this effect should be included in the policy or the deed of indemnity.
  • D&O insurance is an important line of defence.  However, often it is not until a claim is made that one sees the quality of the policy.  Consider if there are any needs specific to your industry that should be addressed in your D&O policy (for example, directors of financial product issuers might ensure that they are covered for claims arising from allegations of misstatement or misrepresentation in a prospectus or similar disclosure document).  As a general rule, a more expensive D&O policy (premium) will provide a better cover.  However, as every company and every insurer is different, the company and each director should obtain independent legal advice about the D&O policy and the coverage it provides.