D&O insurance premiums spark debate

Introduction of the Trade Practices Amendment Bill 2009 has incited further speculation in relation to directors and officers' insurance premiums

Introduction of the Trade Practices Amendment Bill 2009 has incited further speculation in relation to directors and officers’ (D&O) insurance premiums.

According to law firm Mallesons Stephen Jaques, certain liabilities incurred by directors and officers are prohibited from being indemnified by a company or related company under the Bill.

Partner Phillip Ward explains that "indemnification of officers" is a new subsection which business must be aware of.

Item 9 of the Bill inserts a new clause into the Australian Securities and Investment Commission (ASIC) Act 2001.

"This subsection provides that a company or a related company ‘must not indemnify (whether by agreement or by making a payment and whether directly or through an interposed entity) [an officer] against … a liability to pay a pecuniary penalty under section 12GBA [of the Bill] or legal costs incurred in defending or resisting proceedings in which the person is found to have such a liability" where such liability was incurred as an officer of the company," Ward writes.

"Pecuniary penalties under section 12GBA are awarded for contraventions of subdivisions C, D or GC of the ASIC Act which deal with unconscionable conduct, consumer protection and substantiation notices and accessorial conduct in connection with such contraventions."

Breach of this rule may result in a pecuniary penalty of 25 units, and individuals may be implicated in the contravention which is punishable by a fine not exceeding five penalty units.

D&O insurance policies provide insurance cover for directors and officers against the risk of liabilities incurred in their capacity as directors and officers.

A D&O policy may also provide cover to the company effecting the policy by way of reimbursement for amounts lawfully paid by the company to its directors and officers for such liabilities.

"If an insurer is an ‘interposed entity’ for the purpose of s 12GBD(1), then it is arguable that the company, by paying the premium, is providing an indemnity through an interposed entity. If there is no exclusion in the policy for the prohibited liabilities, then procuring cover for such liabilities may be a contravention of s 12GBD(1) and the cover void to the extent of the contravention," Ward says.

While Section 12GBD reflects 77A of the Trade Practices Act 1974, neither the Bill or Act sets out when payment of premiums for D&O insurance is prohibited.

Ward says that Section 12GDB prohibits the payment of a premium by a company for a policy which covers the "prohibited liabilities".

"It is reasonably arguable, however, that the literal meaning should not apply and that ‘interposed entity’ should be interpreted to mean an entity that is controlled by the company or which the company uses to achieve a result indirectly that it cannot achieve directly. An arm’s length insurer charging a commercial premium should not be an "interposed entity" in this sense," he says.

If the additional section does prohibit a company from paying a commercial premium to an "arm’s length insurer" for cover for the prohibited liabilities, Ward suggests one option may be for a D&O insurance policy to provide this cover in a discrete section of the policy.

A separate premium can then be charged for that cover which is paid by the officers rather than the company.

As the proposed Bill contains a lot of ambiguity, submissions are being accepted by the Senate Economics Legislation Committee.

Mallesons Stephen Jaques advises businesses to consider making submissions to clarify the "position for the payment of premiums by a company for D&O insurance which does not exclude the prohibited liabilities under Section 12GBD of the Bill". The closing date for submissions is July 31.

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