All companies need good governance, and that includes family-run enterprises. These decision-makers who steer the direction of the organisation and strategise for profitability and growth also deserve protection.
They deserve protection because this responsibility brings liability in insurance terms. "That means that the people who hold senior management roles can be held personally accountable if things go wrong," says Gallagher family business expert Roz Shaw.
"Directors and officers’ insuranceprotects individuals against being compelled to pay compensation, fines or penalties, as well as legal costs involved in someone bringing a claim against you or your company."
This safeguard is important because a company’s board members are legally liable under a range of state and federal statutes. These include employment, work, health and safety laws, and environmental protection. Publicly listed companies must also comply with continuous disclosure requirements.
How are you liable?
Legal actions may be brought by your own company or its other directors, regulators such as the Australian Securities and Investments Commission (ASIC) or the Australian Prudential Regulation Authority (APRA), employees, creditors, competitors, customers or in worst case scenarios administrators or liquidators.
D&O insurance safeguards past and present company directors and executive officers (chief executive officer, chief financial officer, operations manager and company secretary) from being personally accountable for these financial liabilities. It can also be extended to cover other managers and even some employees, depending on the individual policy’s definition of an insured person (check these details with your broker).
"Don’t make the mistake of thinking D&O insurance isn’t relevant to family-owned businesses," Shaw says. "Even if every seat on your management team belongs to an insider, D&O insurance is important. In fact, possibly even more so because family relationship dynamics can play into blame being ascribed for decisions that deliver less than optimal outcomes."
The fact is that most of us make judgment calls based on our interpretation of the information available and these can be made under pressure or time constraints. Sometimes it’s a case of not having the full picture or being able to please every stakeholder. "Large sums of money or valuable property can be involved and while this responsibility can be an honour and a privilege, it can also expose individual and collective board members to financial risk and put the ‘family jewels’ in jeopardy," she warns.
If you’re looking at D&O insurance for the first time, there are some basics you’ll need to understand. The cover is provided in three parts, that we in the insurance industry call clauses: Side A, B and C. These are designed to cover costs incurred by a company’s directors and officers or the company itself under different conditions. Side C cover only applies to publicly listed companies.
Get expert help
It’s important to understand the distinctions in the cover and this is where your insurance broker plays an important role. As a trusted adviser, your broker helps identify what the indemnity amount should be, including the type of business and the risks that might apply to your family business.
To the extent that any material in this document may be considered advice, it does not take into account your objectives, needs or financial situation. You should consider whether the advice is appropriate for you and review any relevant Product Disclosure Statement and policy wording before taking out an insurance policy.