Directors & Officers | Impact of COVID-19 on Liability Insurance

This article is produced in association with MinterEllisonRuddWatts.

There can be no doubt, as noted by the Chair of Qantas, Richard Goyder, that COVID-19 represents everything that business does not like – uncertainty, unpredictability and adverse economic consequences.  The uncertainty brought about by COVID-19 requires directors to remain focused on a wide range of issues affecting the company as well as ensuring that they comply with their duties including exercising reasonable care, diligence and skill and acting in good faith and in the best interests of the company.  

Key steps for directors include: 

  • focusing on business continuity plans and emergency responses including in relation to the health and safety of workers and others (keeping in mind that directors owe a separate due diligence duty under section 44 of the Health and Safety at Work Act 2015);

  • navigating the sudden shortages of supply and demand; 

  • awareness of debt and funding obligations including banking covenants; and

  • revising strategies to minimise risks and harness opportunities.  

In such a volatile market, directors of listed companies also need to have an increased awareness of their continuous disclosure requirements. Specifically, ongoing reassessment as to the materiality of any guidance previously released. The NZX has stated that it will be working pragmatically with issuers to provide support and guidance. They have provided a Guidance Note on the approach to disclosure, in light of COVID-19 and have also granted temporary class waivers in relation to financial reporting and equity capital raisings. 

Insolvency Provisions

The extra pressure on directors has been eased by the recently announced relaxation of insolvent trading rules.

The newly created proposed safe harbour provides that decisions by a director to keep trading, as well as any decisions to take on new obligations, over the next six months, will not result in a breach of sections 135 and 136 of the Companies Act if:

  • in the good faith opinion of the directors, the company is facing or is likely to face significant liquidity problems in the next six months as a result of the impact of the COVID-19 pandemic on them or their creditors; and

  • the company was able to pay its debts as they fell due on 31 December 2019; and

  • the directors consider in good faith that it is more likely than not that the company will be able to pay its debts as they fall due within the next 18 months (for example, because trading conditions are likely to improve or they are likely to be able reach an accommodation with their creditors).

While the safe harbour in respect of the directors’ duties above provides a level of relief that should give directors greater comfort when continuing to trade in challenging circumstances, it does not change the need to comply with other directors’ duties, including the paramount duty to always act in the best interests of the company.  

The offence for serious breach of the directors' duty to act in good faith and in the best interests of the company (s138A of the Companies Act), and the offence for using false pretences or fraudulent behaviour to induce a person to give credit to the company or that causes material loss to a creditor (s380 of the Companies Act), amongst others, remain unchanged.  

Class action risk 

Directors need to be mindful of class action risk when considering not only their conduct but also the adequacy of their insurance arrangements.  This is especially so given the possibility of an increase in representative (class) actions in the fallout from COVID-19 and due to recent procedural changes with the Court of Appeal’s decision in Southern Response v Ross that permitted ‘opt-out’ class actions where prospective claimants are deemed to be included in a proceeding unless they expressly opt out of it.  

The effect of this opt-out decision on the incidence of class actions is not yet clear, However, class actions are nevertheless increasing and expanding to include securities claims, regardless of the way in which they are brought.  The most recent example being the recently filed CBL and Intueri claims.  

In these uncertain times, directors will need to be extra-vigilant. 

Aon brokers are available to assist with any queries which you have regarding your Directors & Officers Liability insurance policy.

This website contains general information only and does not take into account your individual needs or financial situation. It is important to note that limits, excesses, terms and conditions and exclusions apply to the products and services outlined on this website. Please refer to the relevant policy documents for details of cover, the provision of which is subject to the insurer’s underwriting criteria that apply at the time. Please contact us if you have any questions.