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Jan 3 2018 at 11:00 PM Save Article 2 My Saved Articles Print License article
Updated Jan 4 2018 at 11:02 AM

Companies pay more for directors and officers insurance on

class action spike

Westpac chairman Lindsay Maxsted: "On one view there is a place for class actions, but if you think about it, very
few end up benefiting the class they are supposed to benefit." Peter Rae

by Alice Uribe James Frost

Insurance premiums for directors and officers have surged by as much as 300 per
cent in the last six months following a sharp rise in the number of class actions
launched against Australian companies.

Industry experts told The Australian Financial Review class actions, often related to
alleged failures to meet continuous disclosure obligations, have tripled in the last five
years.

Last week insurer QBE agreed to pay $132.5 million to settle a shareholder class action
over a 2013 profit downgrade. It is understood the settlement will be covered by the
insurer's own insurance and provisions.

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"On one view there is a place for class actions, but if you think about it, very few end
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09/01/2018 Companies pay more for directors and officers insurance on class action spike | afr.com

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Unlike the personal indemnity market, where premiums have only grown by 1 per Latest Stories
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Susie Amos, principal at actuarial firm Finity, said some sectors had been hit 25 mins ago
especially hard because of the increased liabilities insurers are facing for share-
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"Some risks have increased threefold. If it's a large listed company in mining, or a 22 mins ago
financial area or in manufacturing, then I've heard of 300 per cent increases
happening a few times. But even 'good' risks are increasing by 20 per cent," she said. Why the giants of US
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"Fundamentally it's because the insurers are making big losses, that's the main reason 45 mins ago
it's crystallised in the last six months." More

Scott Curley, a director at GSA Insurance Brokers, said "well-run" financial services
companies, fund managers and banks had been hit with 40 per cent increases on
their D&O policies since March, while "obscure" businesses such as Chinese
companies listing on the ASX are now paying up to 300 per cent more for their cover.

D&O cover is comprised of three parts: "Side A" insurance, which protects past and
present directors and executives; "Side B" insurance, which protects the company for
their liability to indemnify their directors; and "Side C" cover, which protects the
company for claims made against it and its D&Os.

More expensive

Mr Curley said it was in "Side C" cover, which most listed companies take out, where
premiums had risen the most. He added that the "banks' [policies] are definitely
getting more expensive".

Industry experts say that the country's bigger banks tend to take out D&O policies
with a ceiling cover of $500 million, and generally pay up to $5000 per $1 million of
cover – or $2.5 million a year – for insurance with a "Side C" component.

This means even a 30 per cent hike on cover within a $500 million policy would mean
a $750,000 increase on the cost of the cover for a big institution.

A 2017 report by law firm Wotton Kearney and insurer XL Catlin found nine out of 10
filed securities class actions were settled in Australia, with insurers facing an average
bill of $40 million for each securities class action settled.

Since a landmark class action against GIO was settled for $97 million in 2003, more
than 30 actions have been finalised, with the largest being a case against Centro,
settled for $200 million in 2012.

Class action firm Maurice Blackburn, which led the QBE action on behalf of
shareholders, said this latest settlement sends a "signal to corporate Australia
regarding the importance of be scrupulous in their adherence to good governance
standards and their continuous disclosure obligations."

Tougher policy arrangements

Currently, Maurice Blackburn is running cases against the Commonwealth Bank of

Australia over the AUSTRAC money laundering scandal, as well as actions against
Sirtex, Crown Resorts and Bellamy's Australia.

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09/01/2018 Companies pay more for directors and officers insurance on class action spike | afr.com

Finity's Ms Amos said some companies had elected to not take out "Side C" cover
"because of the view that they may be a target if they have insurance cover".

According to Mr Curley, insurers will often not allow companies to disclose if they
have D&O cover and are driving tougher policy arrangements as the raft of class
actions hits their profits.

"[For policies] above a $20 million cover limit, you used to be able to work with
insurers to get a relatively reduced price. For the next $30 million above the $20
million, it may come in at half the price of the first $20 million. But what insurers are
saying now is 'we don't feel safe unless we're above $50 million'," he said.

"They still feel that the first $50 million is vulnerable to a class action, where
previously they thought if they were sitting above $20 million they were going to be
pretty safe. With all the litigation going on, a company with a $50 million limit is
pretty fair game."

In 2016 premiums of $200 million for D&O "Side C" policies compared with an
estimated claims cost of double this amount. Many larger companies get a proportion
of their cover from the London market, due to capacity constraints in Australia, and
spread their risk across a number of insurers.

US insurers AIG and Chubb are the hardest being hit companies claiming on their
policies due to class actions Mr Curley said.

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