Developments in Directors’ and
Officers’ liability, risks and exposure

June 2019


In the wake of:

this update considers the recent trends in relation to directors’ and officers’ exposure to risk and liability, including the impact of recent events on D&O liability insurance.

In summary, the frequency and severity of legal recovery actions, as well as community expectations of directors and officers, has continued to increase and expand over the last year. In turn, these trends, coupled with a burgeoning litigation funding market in Australia (especially in relation to shareholder class actions), have led to increasing pressure being placed on directors, officers and their insurance policies. As a consequence, we are seeing increases in premiums and a tightening of policy terms, including exclusions specifically directed to actions arising from conduct disclosed in the Banking Royal Commission.

Impact of the Banking Royal Commission

The ripple effects of the Banking Royal Commission are still being felt in both the financial services sector and other industries. Personal accountability is being emphasized more than ever before and community expectations on companies and their directors and officers have only increased in light of the findings made in the Banking Royal Commission.

Increased personal accountability has extended to a corresponding increase in regulatory action, with government regulatory authorities such as ASIC, APRA and the ACCC being given increased budgets and powers of compulsion to conduct investigations. Further, on the back of criticisms made during the Banking Royal Commission about their previous approach, we expect regulators to be increasingly predisposed to prosecuting companies and individuals, including for conduct which may have previously only resulted in an enforceable undertaking.

For example, in June 2018, the ACCC brought proceedings against ANZ, Citigroup, Deutsche Bank, and several directors of each, for alleged cartel conduct arising out of an institutional share placement for ANZ in August 2015. This was the first case of its kind.

During the last year, we have also seen the passage of stringent new laws and regulations issued by the Commonwealth Government, including amendments to the Corporations Act 2001 (Cth) and the Australian Securities and Investments Commission Act 2001 (Cth), which introduce new, and increase existing, civil penalties for breaches of directors’ duties.

We expect to see substantially more regulatory actions in the immediate wake of the Royal Commission, and for these actions to extend into other areas of corporate governance, such as cyber liability, network vulnerability, business interruption and damage to intellectual property on a director’s watch.

The continued rise of class actions in Australia

Class actions, enabled in part by the increasing presence of litigation funders in Australia, are also contributing to the increasingly litigious environment facing officers and directors.

Some of this can be directly attributed to the Banking Royal Commission. In the past year, class actions have been brought against companies in respect of the following conduct which was revealed during the Banking Royal Commission:

There is a real risk that these types of actions may extend to include directors and officers, especially where there is evidence that such conduct was an entrenched practice of which management was well aware, or the corporate culture or reporting lines meant the conduct was left unchecked.

Building on last year’s update, there has been continued growth in both the number and alleged severity of class actions being commenced by shareholders. Interestingly, there may be a correlation between increased activity from regulators and shareholder class actions. There have been several recent instances where information about a regulatory investigation or proceeding was disclosed to the market, which in turn resulted in a decrease in the share price. This in turn can lead to class action claims by shareholders. For instance, when:

All shareholder class actions filed between 2013 and 2018 were funded by litigation funding. Litigation funders see these kinds of claims as being relatively straightforward and profitable to run.

Shareholder class actions present a special risk for directors and officers, because of the desire to access D&O insurance funds. Allegations are regularly made against directors and officers when companies go into liquidation in order to access D&O policies, as it is often the only remaining financial asset left amongst the corporate rubble. Recent examples of this approach includes shareholder and insolvency proceedings in respect of DSHE Holdings Limited (Dick Smith) and RCR Tomlinson Limited; while a similar approach has been reflected in the consumer class action against Radio Rentals/Thorn. We have also seen the addition of a director or officer as a defendant to proceedings to distinguish one case from another where there is a contest over which competing class action should precede.

In short, with plaintiffs having an enhanced access to financial resources through litigation funding (see below), and in an increasingly crowded market where plaintiff lawyers are jockeying for poll position in competing claims, directors and officers are now more likely than ever to be sued for any perceived wrongdoing which has occurred.

The availability of litigation funding

The litigation funding market in Australia only continues to grow. The numbers speak for themselves, with:

There are approximately 25 active litigation funders in Australian litigation.

Impact on D&O insurance

Each of the above developments have, understandably, caused the D&O Insurance market some concern.

As a result, D&O insurers are becoming more selective about the types of risk they are willing to insure and are being more aggressive with respect to policy exclusions from liability.

We have heard reports that it is now difficult to buy D&O cover for a financial institution without a Royal Commission exclusion. This has led, and may lead going forward, to some financial services companies being unable to make any D&O claims due to their claims being linked to the Royal Commission in some way. However, insurance brokers are reassuring their financial clients that actions arising from claim events during previous policy periods – before the current exclusions became operative – may still be covered. (A view we also hold, subject to specific policy terms and claim circumstances.)

In addition, average D&O premiums have doubled this year. In the financial sector, where the litigation risk is considered much higher due to the Banking Royal Commission’s findings, premiums have risen as much as 400 per cent, or in one case 1000 per cent (ie 11 times the prior year’s premium).

You should continue to obtain advice from your company’s insurance broker about current market conditions and emerging trends with policy terms.

Concluding remarks

An ALRC report entitled ‘Integrity, Fairness and Efficiency – An Inquiry into Class Action Proceedings and Third-Party Litigation Funders’, published on 24 January 2019, notes that insurers and brokers assert that there has been a direct link between the increased number of class actions and the resultant insurance claims paid and premiums, risk retentions and the availability of D&O insurance. This is undoubtedly correct and for the reasons noted above, this trend is likely to continue – at least until there is legislative intervention and/or a significant change in current judicial and community sentiment, including towards litigation funding.

As always, the best strategy to protect your directors and officers is to have robust corporate governance policies and practices in place. There is no substitute for a corporate record of proactive and world class risk management, training and practices, coupled with a good claims record. In the current market, such practices become even more important, both for the prevention of claims and in assisting the company and its directors and officers to obtain the best insurance cover at the best possible price.


Michael Mills

Michael Mills
Managing Partner

T: +61 2 9146 3555
M: +61 448 795 544
E: michaelmills@quinnemanuel.com
Michelle Fox

Michelle Fox
Managing Partner

T: +61 2 9146 3666
M: +61 438 053 332
E: michellefox@quinnemanuel.com

June 2019