Rise in class actions drives up insurance costs
INCREASING payouts in shareholder class actions are pushing up premiums for directors' and officers' insurance.
The total value of class action settlements reached $506 million in 2012, up from about $200 million in 2007, according to a report by law firm King & Wood Mallesons.
With class actions becoming more common and with increasing responsibilities for directors under new regulations, insurers say directors' and officers' insurance is becoming less profitable for them.
This forces them to either reduce limits or increase premiums.
Some directors have already started increasing their indemnity, says Julie Hamilton, a national directors' and officers' insurance specialist at Aon Risk Solutions.
While the cost of insurance has not increased substantially - because there are still many willing insurers in the market - she warns this may not last.
"As a result of the increasing body of class action settlements there is an increased focus by many insurers on both capacity and retention management . . . While insurer competition is continuing to suppress rates, some insurers are 'testing the waters' by seeking opportunities for modest rate increases where circumstances allow," Ms Hamilton said. Some directors of ASX-listed companies have recently increased their indemnities after benchmarking their policies against peers and claims data.
And directors who specifically chose not to take coverage against class actions could get a discount, Ms Hamilton said.
A spokesman for insurer CGU confirmed the market remained competitive but said the company was "keeping a watching brief on the issue and is closely monitoring claims costs". "There has been a trend of increasing litigation against company directors in recent years," he said.
"Claims payouts for directors' and officers' insurance have also risen."
The Australian head of financial lines at Zurich General Insurance, Stephen Bonnington, said rates for directors' and officers' insurance had "remained relatively stable" over the past two years.
However, Zurich has seen insurers reducing policy limits, particularly where clients elect to purchase coverage protecting them against securities litigation, he says.
"The litigation environment, and the increased powers of regulators, do have an impact on both the frequency and severity of claims and I am sure many insurers are carefully watching developments in these arenas," he said.
Directors' and officers' insurance is usually paid by the company on behalf of the board and senior management. It protects their personal assets if claims are made against the company, including claims by regulators, shareholders or individuals for breaches of duty or misleading and deceptive conduct.
Directors have also had to double-check what coverage they have under the new Australian Consumer Law, which can see directors disqualified if their company breaches the act. Companies are not allowed to indemnify directors against liability for these breaches, or against their legal costs.
However, companies can offer loans to directors to cover legal fees.