April 9th, 2020 Covid-19, Australia

COVID-19 and its impact upon Australian Directors & Officers Liability Insurance (D&O)

As the COVID-19 crisis continues, directors and officers are facing unchartered waters as they navigate their businesses through this tough period in the hope they can survive and come out the other side as a viable trading operation.

The crisis and its impact upon directors and officers has been recognised as an important matter resulting in early intervention measures being enacted by the Australian government.

The Coronavirus Economic Response Package Omnibus Act 2020 (Cth) provides an expanded safe harbour for directors (in addition to the safe harbour provided by s588GA of the Corporations Act 2001 (Corps Act)). Under the new s588GAAA, personal liability under s 588G(2) will not apply if a debt is incurred in the ordinary course of the company’s business for a six month period from 24 March 2020. This is effectively a 6-month moratorium on insolvent trading. The threshold for issuing statutory demands has also increased from $2,000 to $20,000.

What does this mean for directors?

This change in legislation allows directors to get on with the job at hand, without fear of unintentionally breaching their obligations under the Corporations Act by trading whilst insolvent potentially facing personal penalties. In these uncertain times, directors will have to carefully assess their businesses financial position as a going concern, while also addressing sensitive issues where necessary, such as retention of staff and reducing costs where possible. Although it is expected that this crisis will impact some industries greater than others, it is widely understood that the majority of commerce will face challenges through this period. Directors will also have to steer their organisations through the crisis without certainty of how long it will last. This is no easy task.

How is the market responding and what does this crisis mean for D&O placements in 2020?

BMS have undertaken various discussions with leading D&O markets over the past 2 weeks to better understand any impact to upcoming D&O placements (both renewals and new business).

The D&O market is already adjusting to adverse impacts from the Hayne Royal Commission in Australia, continued entity security related class actions (also known as side C claims), contraction of capacity as a result of changing underwriting guidelines and implementation of profitability measures such as the Lloyd’s decile 10 strategy. These issues have resulted in a tightening market with restricted limits available combined with increased pricing (substantial in some areas such as side C cover for listed companies). The COVID-19 crisis adds another layer of complexity to the market environment.

Although the crisis is still unfolding, D&O markets have moved early to identify areas of concern. While some insurers will look to protect their positions by imposing and maintaining certain exclusion on policies, most leading markets recognise the weakness in relying solely on policy terms (such as insolvency exclusions) and prefer to impose tighter underwriting criteria at the point of risk analysis. What this ultimately means for clients is that insurers will be taking a closer look at a number of areas of your business to form a view of the likelihood of the business to successfully navigate the crisis and come out the other side.

It is likely that if insurers cannot gain a level of comfort about the ability of an insured organisation to adapt and survive over the next 6 to 12 months they may decline to offer any terms rather than rely on policy exclusions.

What can you do as an insured?

Early engagement, early engagement, early engagement!!

As we have witnessed through 2019, the traditional market placement approach has become ineffective if your advisor does not engage and agree on an adaptable strategy way in advance of renewal or placement. It is critical to discuss and agree on a market strategy at least 4 months out from renewal. Implementation of this strategy should be adaptable and allow for movement of capacity, limits, deductibles and adequate time to guide insurers through your business providing that level of comfort necessary to attract their attention and interest.

Should you wish to discuss this matter further or have any questions please feel free to contact us.

Stuart Davies
Director and National Head of Financial Lines
Tel: 02 9165-3511
Mobile: +61 413-173-975
Email: stuart.davies@bmsgroup.com

Sam Ford
Divisional Director – Financial Lines
Tel: 02 9165-3510
Mobile: +61 422-868-337
Email: samantha.ford@bmsgroup.com