10 Jul 2009
Is the climate right to change your D&O insurance?
by Peter Mann, David Gerber
The legislation for the Carbon Pollution Reduction Scheme highlights the need to consider carefully the scope of D&O insurance policies.
The Bills introduced into Parliament to implement the Carbon Pollution Reduction Scheme will impact directly a large number of entities and their directors and officers. There will also be a broad, indirect impact when emissions trading starts. The CPRS Bills draw attention to key areas of D&O insurance policies.
Liability of executive officers and insurance for pecuniary penalties
Under Part 20 of the Carbon Pollution Reduction Scheme Bill 2009 (Cth), an executive officer will contravene a civil penalty provision if they are involved in a contravention by their company. This makes executive officers personally liable for misconduct of the company if they have been reckless or negligent. The result may be significant pecuniary penalties imposed on the executive officer.
The Consequential Amendments) Bill also extends the liability regime under the National Greenhouse and Energy Reporting Act 2007 (Cth). Part 4 of the NGER Act will no longer be limited to liability of chief executive officers. It will, like the CPRS Bill, soon apply to a director, the chief executive officer, the chief financial officer and the secretary of a company. This would appear to include non-executive directors.
Traditionally insurers have excluded liability for fines and penalties under D&O policies. Recently however there has been a move by some insurers to provide cover for civil penalties in some circumstances. It may be against public policy to cover officers for civil penalties where there has been a wilful or deliberate breach of duty. On the other hand, vital cover may be available for officers who have only been negligent. Companies and their directors may wish to consider whether their D&O policy provides cover for pecuniary penalties and whether that cover will extend to potential liability under the CPRS and NGER Act.
The new regulator and insurance for investigation costs
The Australian Climate Change Regulatory Authority Bill 2009 (Cth) establishes the Australian Climate Change Regulatory Authority, which will be responsible for administering the CPRS, the Renewable Energy Target and the National Greenhouse and Energy Reporting System. Since climate change is one of the Federal Government's key priorities, it may well become a powerful regulator.
When ASIC launches an investigation, the company and its directors can incur significant costs. The market for D&O insurance covering investigation costs has grown in recent years. Some policies will now cover directors for their costs in responding to an ASIC notice or attending an examination by ASIC, even if they have not been accused of any wrongful act. A more extensive policy may even provide cover when no formal notice has been served but the director is nevertheless required by the regulator to co-operate in some manner. When the Climate Change Authority exercises its powers, directors may need to look to their insurer to cover investigation costs.
Liability linked to the company and insurance for outside directorships and JVs
In its current form the CPRS Bill allows for transfer of liabilities and the nomination of a joint venture company to be the responsible entity. It is possible that a company may be liable for the control of a facility by an entity which is not a member of the company's group. An executive officer can be personally liable for their company's contravention of a civil penalty provision in the CPRS. That liability is linked to the company and not the operating entity.
The Government is continuing to consult with key stakeholders about controlling corporation liability and mechanisms to transfer that liability within corporate groups. For directors who hold outside directorships and responsibility in relation to unincorporated joint ventures, however, it may be time to consider carefully the scope of their D&O policy as it applies to these issues. Some policies do not provide cover for outside directorships unless specifically requested. Others may automatically cover directors nominated to the boards of other companies but may exclude joint ventures.
Finally, many insurance policies contain an exclusion relating to liability arising from the release, discharge or escape of pollutants. These are generally broadly worded exclusions. They could go so far as to impact cover which may otherwise have been available for liability under the CPRS.
Directors may wish to have frank discussions with their insurer about cover in relation to the CPRS. At a minimum, directors may want to consider a D&O policy which provides cover for "pollution defence costs". They may also consider seeking that cover without a sub-limit of liability. A more extensive policy may even cover shareholder claims arising from pollution issues.
Subject to their passage through Parliament, the Bills establishing the CPRS will herald a new era in corporate responsibility. It is yet another reminder of the importance of considering D&O insurance in the context of the company's broad risk management framework.