ASIC v Bekier: Ten D&O insurance and indemnity considerations

What happened in ASIC v Bekier?

As we have previously reported:

• the Court found:
  

  • Mr Bekier (Star's former CEO) and Ms Martin (Star's former Group General Counsel, Company Secretary and Chief Risk and Legal Officer) breached their duties of care and diligence under s180(1) of the Corporations Act; and

  • Star's non-executive directors (NEDs) did not breach those duties; and
    

• The Court imposed a pecuniary penalty of $700,000 and a disqualification order of 6 years on Mr Bekier and a pecuniary penalty of $400,000 and a disqualification order of 7 years on Ms Martin, and ordered that both Mr Bekier and Ms Martin pay 45% of ASIC's costs, jointly and severally.

What are the key considerations in reviewing D&O insurance and indemnity arrangements?

D&O insurance and company deeds of indemnity, insurance and access (indemnity deeds), and the interaction between the two, are complex, and the quality of D&O insurance products and indemnity deeds varies.  D&Os should regularly test whether those protective arrangements are adequate.  Our top ten considerations in light of ASIC v Bekier are, in summary:

1.  Maximum cover permitted by law: The Corporations Act prohibits:

• (in s199B) insurance against liabilities of D&Os for wilful breach of duty or contravention of ss182 and 183 (improper use of position or information); and

• (in s199A) company indemnification of D&Os against certain liabilities and legal costs.  These include liabilities owed to the company and liabilities for pecuniary penalty orders under s1317 (such as those sought in ASIC v Bekier).

Otherwise:

• D&O insurance should cover liabilities and defence costs, including liabilities owed to the company (such as the liabilities proven against Mr Bekier and Ms Martin) and pecuniary penalties (both of which, as noted above, cannot be met by the company under indemnity deeds); and

• indemnity deeds should indemnify to the maximum extent permitted by law, which can include the costs of defending a claim for breach of a duty owed to the company as long as that liability is not proven by judgment or admission (this cover would have been important for the NEDs, who successfully defended ASIC's claims).  

2.  Carefully review D&O insurance exclusions: Allied to point 1 above, D&O insurance should not include any exclusions other than for proven liabilities for wilful breach of duty, contravention of ss182 and 183 of the Corporations Act and fraud and dishonesty.  Further, it is important that such exclusions expressly state that they do not apply unless and until there is a final, non-appealable judgment which establishes such conduct.  Such exclusions should not apply where conduct is alleged but has not been made out, nor should they operate based on the insurer's views.

3.  Advancement of defence costs: Both D&O insurance and indemnity deeds should clearly state that, irrespective of whether allegations may (if made out) engage an exclusion (e.g. an allegation of dishonesty), the insurer or the company will advance defence costs (including appeal costs) unless and until there is a final, non-appealable judgment which establishes such conduct.

4.  'Innocent D&O' protection: D&O insurance should expressly state that where there has been fraud or dishonesty by one D&O, the innocent D&Os should remain protected, even if the claim against them arises from the fraud or dishonesty of a fellow D&O.

5.  Pecuniary penalties: As noted above, the Corporations Act prohibits company indemnification of D&Os against pecuniary penalties for Corporations Act breaches.  However, D&O insurance should be drafted to provide cover for pecuniary penalties and fines to the maximum extent permitted by law (this will exclude criminal fines and penalties and monetary penalties under WHS/OH&S legislation), such as the pecuniary penalties sought by ASIC.  In the ASIC v Bekier penalty judgment, Justice Lee noted that D&O policies may, depending on their terms and the nature of the conduct in question, respond to liabilities arising from proceedings.

6.  Limits of liability: Companies and their D&Os should review with their insurance brokers the adequacy of limits of liability, any sub-limits and policy program structure.  In respect of the latter, consideration should be given to dedicated limits of liability for directors, whether to purchase any 'Side A only / difference in conditions' insurance directly covering D&Os, and (if applicable) whether to retain 'Side C' insurance (securities claims against the company itself – such claims can deplete insurance limits otherwise available to D&Os).  In the case of the ASIC v Bekier proceeding, there were 6 separate legal teams acting for the D&Os and it is likely that the legal costs for each defence team was many millions of dollars.

7.  Pre-approval of legal representatives and rates and conduct of claims provisions: Where possible, D&O insurance should allow D&Os to select their preferred lawyer to defend a claim against them and provide for pre-approval of the preferred legal representatives and their rates.  This will enable D&Os to use their preferred defence team and avoid dispute with insurers about what are 'reasonable' rates.  Regulatory proceedings against D&Os are of reputational importance and D&Os (or the company where it can reimburse the D&Os) should not be left to pick up any shortfall between actual defence costs and what insurers may assert to be 'reasonable'.  The ASIC v Bekier trial was heard over 22 days and a further 2 days for the 'penalties' hearing, and other claims against D&Os have taken substantially longer – costs will be significant.

Claims conduct/control clauses should also be carefully reviewed and fairly balanced, and provide a clear mechanism for resolution of any disputes which may arise between D&Os and insurers or the company.

8.  Clear cover for costs exposure: D&O insurance and indemnity deeds should cover liability to pay the claimant's costs, to the maximum extent permitted by law.  As noted above, Mr Bekier and Ms Martin were ordered to pay 45% of ASIC's costs.

9.  Cover for investigation costs: Regulatory claims are often preceded by regulator inquiries and investigations.  D&O insurance and indemnity deeds should cover the costs of responding to such inquiries and investigations.

10.  Notification and disclosure: D&O insurance is typically 'claims made' insurance, meaning the policy in place at the time a claim is made against the D&O (rather than when the underlying conduct occurred) applies unless the claim arises out of circumstances notified under a previous policy.  D&O insurance should include a term which provides that if during the term of the policy potential claims, facts or circumstances are notified, a subsequent claim arising out of those potential claims, facts or circumstances will be deemed to have been made during the policy period, regardless of when it is made.  D&Os should also be familiar with their contractual obligations to notify of claims and potential claims circumstances under D&O insurance and indemnity deeds, and the duty of disclosure under the Insurance Contracts Act (which is a complex topic of itself).