D&O and Management Liability  are insurance  policies held by many Australian companies on behalf of individuals with Board positions or  leadership responsibilities. The policies protect an individual’s unlimited personal liability under the Corporations Act (Cth).

However, it can be confusing to know what’s the better option to ensure  adequate and appropriate coverage for both companies and individuals alike.

Here’s a quick 2-minute breakdown of what is typically covered, how they’re different, and who each product is best suited to.

Directors and Officers Insurance.

There are 3 core policy sections of a D&O policy. These are:

Side A - non-indemnifiable loss

Side B - indemnifiable loss

Side C - securities entity coverage

The aim is to protect individuals and the companies themselves from financial loss associated with an alleged wrongful act. You don’t need to be a Director or Officer to be protected by the policy as claims could be made against managers or senior employees.

Side A Coverage

This is the core coverage of a D&O policy. It protects directors and officers personally from claims made against them for wrongful acts, even if the company is unable or unwilling to indemnify them. For example, if you’re a Director of a company that hits financial difficulties and is financially unable to indemnify you, or if there is a dispute between you and the company, the insurer will indemnify you directly.

Side B Coverage

This coverage reimburses the company for amounts it pays to indemnify its directors and officers for claims made against them. The Australian Corporations Act sets out when a company should indemnify a director or officer, or there may be a special agreement in place between the individual and the company (Deed of Indemnity). In these instances, the insurance company reimburses the cost that the company pays for indemnifying the individual.

Side C

Side C coverage is often referred to as ‘entity coverage’ and typically suited for publicly-listed companies which are traded on the Australian Securities Exchange. Side C coverage protects companies from securities claims which are usually brought in the form of a class action. Claims usually relate to  breaches of stock exchange disclosure obligations which lead to a loss in shareholder value. Common examples are breaches of continuous disclosure obligations, breaches of fiduciary obligations and/or misleading and deceptive conduct.

Aside from Directors and Officers Insurance, there is also Management Liability which is aimed at the SME sector.

Management Liability Insurance

Management liability insurance is suited to businesses where the directors are also the owners - typically small and medium-sized companies. Management Liability insurance generally includes D&O Side A and Side B coverage, but does not include Side C cover as the company is not listed on an exchange. However, Management Liability also covers claims brought against the company itself.

This can include insurance coverage for claims against directors relating to insolvency, employment practices liability (i.e. unfair dismissal, bullying etc), crime liability (for white-collar crime by an internal or external perpetrator to the business) and statutory liability (for breaching regulatory standards such as from an environmental agency), among other covers.

What’s better - D&O or Management Liability insurance?

It comes back to your unique circumstances, and who is driving the purchase of the policy.

For a director of a publicly-listed company that wants to protect their unlimited personal liability, D&O may be more suited (but being mindful of what Side C cover they are sharing with the company).

For a Managing Director and owner of an SME manufacturing business, Management Liability is likely to be more suitable as cover for claims against the directors and the company are both important.

As a director of a company, you also need to consider the Deed of Access and Indemnity. This is a legal agreement between a company and its directors or officers which provides 3 key protections.

These include:

1. Access to company documents to ensure you can obtain the necessary information to defend yourself against any claims or allegations.
2. What legal costs and other liabilities incurred by directors in their role that the company agrees to cover.
3. How the company commits to maintaining D&O or Management Liability insurance for the benefit of its directors.

Of course, all information in this post is of generic nature only. For tailored advice suited to your unique situation, make sure to contact the Pillar team who are more than happy to assist.