PROFESSIONAL & FINANCIAL RISKS // DIRECTORS & OFFICERS //
TRENDING TOPIC // AUSTRALIA
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Liberty’s defence cost provision
Avoid the gap
Three examples
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An alternate approach to Defence Cost allocation for Directors & Officers insurance claims
Allocation of costs in Directors & Officers Liability claims has long been a controversial and potentially distracting issue for both insurers and insureds.
The intention of allocation clauses in Directors & Officers policies is to enable an insurer to apportion costs incurred by an insured between ‘covered’ and ‘not covered’ matters. This typically arises where either:
only parts of a claim against an insured are covered by the Directors & Officers policy (for example, where a director is sued in their capacity as both a director and shareholder)
costs are jointly incurred by an insured, who is covered by the policy, and another party, who is not covered by the policy (for example, where a director and company are sued and only the director is entitled to indemnity)
The allocation process can sometimes present major practical challenges as it requires an insurer to assess the relative legal and financial exposures of the covered and not covered aspects of a claim, at an early stage of proceedings and without the benefit of all relevant information.
This process can also be a distraction from the ‘main game’ of defending a claim and achieving a mutually acceptable outcome, because an insured will be required to focus on the threshold issue of who is paying what proportion of the defence costs being incurred. This is particularly so when the amounts being incurred are significant, and/or the proportion that the insurer will not indemnify falls to a party with limited financial means. In addition, a dispute about allocation will inevitably involve time and additional legal costs for both the insurer and the insured.
Liberty’s defence cost provision
Liberty Specialty Markets (Liberty) aims to address these issues in our current Directors & Officers liability insurance wording, by inclusion of the following provision:
Where Defence Costs directly attributable to the investigation, monitoring, settlement, defence or appeal of any Claim covered under this Policy also benefit a matter which is not covered or a non-insured party, Liberty will pay all such Defence Costs
This provision means that so long as Defence Costs incurred by an insured are directly attributable to a covered Claim, they will be covered in full by Liberty, even if they also benefit:
a matter that is not covered
a party that is not covered under the policy
This outcome is unlikely to be achievable with a typical allocation provision.
Liberty’s Directors & Officers policy provides enhanced common costs allocation language as a standard inclusion. This claims condition specifies that, where covered defence costs also directly benefit a matter which is not covered or a non-insured party, the policy will provide cover for all such common defence costs.
Avoid the gap
Liberty’s approach to Defence Costs potentially offers a significant benefit for both insured directors and officers by avoiding a possible gap in cover, but also for non-insured parties, such as the policyholder company, where there is joint representation.
As such, this aspect of Liberty’s Directors & Officers policy wording presents a product enhancement with potential financial benefits for not only insured directors and officers but also policyholder companies and their subsidiaries.
That said, insureds and their advisers need to be mindful of managing potential conflicts of interest where a company seeks joint representation with a director or officer to benefit financially from the policy indemnity, but where the legal interests of the company and its directors and officers are not necessarily aligned. This does not diminish the potential benefit of the product enhancement but is an issue that should be monitored and managed.
Meredith Lieu
Australian Directors & Officers Commercial Portfolio Manager,
Liberty Specialty Markets
“
Liberty’s allocation clause is a clear differentiator within the market. It provides coverage which no other insurer has within their Directors & Officers policy wording. In the event of a Claim, where common defence costs are incurred, such costs could be significant. This coverage is a major cost benefit offering personal protection for the directors and officers as well some balance sheet protection for the company.
“
3 examples
1.
Directors being sued in dual capacity
2.
Shareholder oppression claim
3.
Specific matters exclusion
Directors being sued in dual capacity
Liberty’s approach to Defence Costs potentially offers a significant benefit for both insured directors and
officers by avoiding a possible gap in cover, but also for non-insured parties, such as the policyholder company, where there is joint representation.
As such, this aspect of Liberty’s Directors & Officers policy wording presents a product enhancement with potential financial benefits for not only insured directors and officers but also policyholder companies and their subsidiaries.
That said, insureds and their advisers need to be mindful of managing potential conflicts of interest where a company seeks joint representation with a director or officer to benefit financially from the policy indemnity, but where the legal interests of the company and its directors and officers are not necessarily aligned. This does not diminish the potential benefit of the product enhancement but is an issue that should be monitored and managed.
Under Liberty’s policy wording, allocation would not occur so long as the Defence Costs in question were directly attributable to the defence of a covered Claim. If so, Defence Costs would be fully funded by Liberty.
2.
Shareholder oppression claim
It is common in shareholder oppression claims for a director and the company to be sued. Typically, the director will be covered for such a claim while the company will not[1]. However, the director and company may be jointly represented and the legal work involved in defending the claim will overlap significantly.
Under a Directors & Officers policy with a standard allocation provision, the insurer would allocate Defence Costs between the director (covered) and the company (not covered) for all common tasks performed by the jointly retained lawyers, with the company liable for the uncovered amount.
[1] Unless the company has taken out entity cover for securities claims and the shareholder oppression claim falls within the scope of the definition of Securities Claim.
This allocation would not need to occur under the Liberty policy provided the Defence Costs being indemnified were also directly attributable to defence of the covered Claim.
3.
Specific matters exclusion
A specific matters exclusion operates to exclude liability for pre-existing risks identified by an insurer such as
certain specified events, transactions or pre-existing litigation.
A director may receive a summons for examination by a regulator which seeks to examine the insured about a broad range of conduct which includes, for example, a transaction which is identified in a specific matters exclusion, but in circumstances where the majority of the matters in the summons concern conduct wholly unrelated to the excluded transaction.
Under a Directors & Officers Policy with a typical allocation clause, Defence Costs incurred by the director in attending the examination may be allocated between transaction aspects of the investigation (uncovered) and the balance of the examination matters (covered) with the result that the director would be left to fund the non-covered component of those Defence Costs.
Under Liberty’s policy, the director would have the benefit of the Defence Costs incurred for the uncovered matters, provided they are also directly attributable to the covered examination matters.
1.
Rebecca Short
Senior Claims Specialist and D&O Tech Lead
Professional & Financial Risks,
Liberty Specialty Markets
“
Directors and Officers may not realise how beneficial our allocation clause is until they are actually facing a claim with significant uninsured exposure. With Liberty’s Directors & Officers allocation clause, the individual has the comfort that all of their ‘common’ defence costs will be covered by Liberty, which is likely to relieve a huge upfront personal cost liability the individual would otherwise face and allows the individual to simply focus on defending the claim at the outset. Previously those ‘common’ defence costs would be subject to negotiation and only a percentage of coverage.
“
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Contact us
If you are looking for more information, please contact Liberty's Directors & Officers Liability team.
Melbourne
Meredith Lieu
Australian D&O Commercial Portfolio Manager Professional & Financial Risks
T +61 3 9619 9813
E meredith.lieu@libertglobalgroup.com
Sydney
Rebecca Short
Senior Claims Specialist and D&O Tech Lead
Professional & Financial Risks
T +61 2 8298 5938
E rebecca.short@libertyglobalgroup.com
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Liberty is not authorised to provide financial product advice. The information in this document does not take into account your objectives, financial situation or needs.
Always consider the applicable policy wording and other relevant documents before deciding to acquire a financial product.
This document is intended to broadly illustrate the kinds of exposures a business can face in respect of allocation clauses. It is not a comment on insurance coverage available from Liberty. It is intended to provide general information and commentary and should not be relied upon as legal advice. You should not rely on this information without first obtaining professional advice.
Liberty means Liberty Specialty Markets, a trading name of Liberty Mutual Insurance Company, Australia Branch (ABN 61 086 083 605; AFSL No. 530842 (for claims handling and settling services only)) incorporated in Massachusetts, USA (the liability of members is limited); Liberty Specialty Markets Hong Kong Limited (UBI 66395065); Liberty Specialty Markets Singapore Pte Limited (UEN 201538069C); and Liberty Specialty Markets Singapore Pte Limited, Labuan Branch (Company No. LF12903), a licensed insurer under the Labuan Financial Services and Securities Act 2010 (Licence No. IS2016162).
[1] Unless the company has taken out entity cover for securities claims and the shareholder oppression claim falls within the scope of the definition of Securities Claim.
AP0979
Last updated 01/2025
About Liberty Specialty Markets
About Wotton & Kearney
Wotton Kearney is not authorised to provide financial product advice. The information in this document does not take into account your objectives, financial situation or needs. Always consider the applicable policy wording and other relevant documents before deciding to acquire a financial product.
Wotton + Kearney Pty Ltd, ABN 94 632 932 131, is an incorporated legal practice. Registered office at Level 9, Grosvenor Place, 225 George Street, Sydney, NSW 2000. Wotton + Kearney, company no 3179310. Regulated by the New Zealand Law Society.
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