Directors & Officers - The heat is on

You will be aware of the high-profile Mainzeal case brought by liquidators against the former directors which has been widely reported in the press[1]. The judgment has pushed Directors and Officers Liability insurance back into the spotlight. At the same time, there have been other pressures on this type of insurance, including the rise of class actions and litigation funding in New Zealand.

The background

The Mainzeal case was brought by the liquidators of Mainzeal on behalf of unsecured creditors, who sought awards of between $32.8 million and $75.3 million from the four former directors. After consideration, which included assessing damages using estimated losses, and then applying discounts for other factors that the Court felt contributed to the loss, the High Court ultimately awarded a total of $38 million to the creditors.

Three of the four directors were found liable for $6 million each (Dame Jenny Shipley, Peter Gomm and Clive Tilby) and the fourth director (Richard Yan) was found liable for $36 million. It is understood that Mainzeal had Directors & Officers Liability insurance in place with a $20 million limit. 

The Mainzeal Directors appealed the decision but were unsuccessful. On 8th May, 2019, Justice Cooke ruling that the original penalties should stand and awarding costs to the Liquidators.

The case now raises several questions about:

  • under insurance;

  • the adequacy of policy limits;

  • the inclusion of defence costs; and the priority of access to policy limits (i.e. if you have a claim larger than the insurance limit then who pays what?)

What is Directors & Officers insurance?

Choosing the structure of a new business is an important decision. Many New Zealanders choose to establish Limited Liability Companies, which legally separate the company from the people who own it — its directors and shareholders.

There are financial benefits in operating a Limited Liability Company rather than alternative structures such as a Sole Trader or Partnership; but there is also more regulation involved. Directors and Officers must understand their responsibilities under the Companies Act 1993 and the other risks involved in becoming a Director. For directors and officers of limited liability companies, Directors and Officers Liability Insurance transfers some of that risk to insurance.

Often misunderstood, Directors and Officers Liability Insurance is designed to protect directors, officers and employees involved in the management of a limited liability company from personal loss resulting from legal claims made against them while undertaking their duties on behalf of the company.

Directors and Officers Liability insurance covers:

  • Damages/ judgments including settlements negotiated with the insurer’s prior written consent;

  • Legal costs and expenses awarded against a director or officer; and

  • Defence costs.

Claims may come from several directions such as:

  • Investigations, examination or prosecutions by regulatory authorities, notably the Commerce Commission, Financial Markets Authority or Work Safe NZ;

  • Claims from competitors alleging anti-competitive trade practices;

  • Insolvency claims – allegations of reckless trading, or trading while insolvent;

  • Employee claims such as unfair dismissal, wrongful discrimination or sexual harassment; and

  • Claims from investors alleging misrepresentation in a product disclosure document (Prospectus).

The rise of class actions

Class actions (or representative actions) such as Mainzeal, while more common in America or Australia are also allowed under New Zealand law and perhaps more likely with litigation funding specialists available. Currently there are seven litigation funders operating in New Zealand; four from Australia and one from the United Kingdom.

Representative actions allow one person to represent a group of others where the group has the same interest. The key requirement is that the plaintiff group has a common interest. To date, representative actions in New Zealand have been ‘opt-in’ class actions, which require people to knowingly elect to participate in the action.

Funding arrangements, effectively structured as loans from the funder to the funded claimant/plaintiff, are often used in representative actions. Typically:

  • If the claim is successful, the funder is reimbursed the cost of funding plus a percentage of any award;

  • If the funding is unsuccessful, the funders do not recover any of the funding payments and are required to pay costs award on behalf of the unsuccessful claim.

It is clear to see how appealing this sort of approach would be to a claimant.

All the above should ring alarm bells for all company directors to ensure that they have adequate Directors and Officers Liability insurance in place.

Other things to consider

Directors and Officers Liability insurance is a ‘claims made policy’. You must have insurance in place at the time the claim is made. These types of liability claims are ‘long tail’, which means that a claim may arise years after the decisions or events that trigger the claim. Directors must be sure that if they cease a directorship, that cover remains in place after they have departed. If selling or winding up a business, it is recommended that Directors and Officers purchase run-off cover to ensure any future claims are captured.

For those who sit on multiple boards, Personal Directors & Officers Liability is a good option to supplement Corporate Directors and Officers policies.

Insurers responses

With rising claims costs across most insurance lines and increased risk in liability insurance, insurers are closely reviewing Directors & Officers Liability insurance terms.

Company financials are now under more scrutiny; insurers are particularly interested in structures involving parent companies / local companies and funding support and generally being more cautious about the capacity and terms offered.

Allianz, one of the world’s largest insurers, has made significant changes and removed themselves from this market as noted by Allianz Global Corporate & Specialty Board Member and Chief Regions and Markets Officer Sinead Browne:

Allianz Global Corporate & Specialty (AGCS) will cease underwriting long-tail risks in Australia and New Zealand from September following a strategic review of the business.

… [I]t will also close its operations in New Zealand with lines such as engineering, property, energy, entertainment and alternative risk transfer to be written out of Australia in future.

… [Because] it is no longer sustainable to continue offering long-tail risk coverage, with corporates exposed to an alarming increase in class action lawsuits and litigation funders.
The rise in legal funders and the ultra-challenging legal environment which drives extraordinary claims levels in our sectors have made it untenable for AGCS to continue offering long-tail business in the Pacific.

Manage and reduce risk

The good news is you can manage and reduce your risks. Having good corporate governance in place is a good start; however, you cannot avoid all risk and for that reason a Directors & Officers Liability policy is recommended.

Make sure you get good advice on adequate limits, place the cover with well rated, trusted insurers and allow plenty of time for negotiation and placement of your policy.

Make sure you read and understand the cover and, in particular, any endorsements that might limit the cover offered.

With good governance in place and the appropriate Directors & Officers Liability insurance you can minimise some of the challenges faced by directors and officers.

Aon Directors and Officers Liability insurance contacts:

Heidi Axtell | Aon New Zealand |

Cindy Moxley | Aon New Zealand |

[1]              Mainzeal Property and Construction Limited (In Liq) et al v Yan and others [2019] NZHC 255 (26 February 2019).

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.