Reinforcing the recent Supreme Court ruling on D&O policies could lead to entrepreneurship being stymied and less talented members serving on boards, says leading commercial insurer
AIG.
Speaking exclusively to
Insurance Business, AIG NZ Ltd CEO
Cris Knell said it was essential that directors were empowered to make sometimes risky business decisions without the impediment of being taken up with a claim.
“Directors and officers run our best companies, they have to be of a calibre to ensure those companies are successful not just in New Zealand but on a broader stage,” said Knell.
“If we don’t protect the companies, the boards and the directors and empower them to make those sometimes risky business decisions then we’re likely to get into a less favourable business environment, we’ll attract less capable people and it would also perhaps stymie the more entrepreneurial behaviour that we know Kiwi companies are very capable of.”
The Supreme Court decision in December 2013 is the latest in a long-running dispute regarding the Bridgecorp directors’ rights to claim reimbursement of their defence costs under a D&O policy which aggregated cover for liability and defence costs.
The Supreme Court ruled that where a person is insured against liability for damages or compensation payable to a third party, section 9 of the Law Reform Act 1936 gives that third party direct recourse to those insurance monies.
AIG’s solution to the Section 9 ruling was released in response to the initial High Court judgement and effectively ring-fences legal costs from third party damages.
“We’ve now separated the limit of liability and the defence costs in two separate sections so we have the ability and flexibility to make sure that our insureds are defended appropriately ,” said Knell, who believes the premise of innocent until proven guilty was the overriding principle behind the change. “And equally we also have the limit of liability which is structured as such that it remains whole in the event that damages are incurred.”
Without these changes insurers would be left taking the risk of the resolution – which Knell describes would be an inequitable and uncomfortable position for AIG to take.
“That means that if a claim looked like it could possibly be over the limit of liability, that at the very beginning of proceedings we as the insurers would be put into the position of being the judge and the jury and deciding whether or not to defend our insureds,” he said.
“We don’t welcome that so the positive direction we’ve taken by separating those limits is that we still have the ability to act as a prudent insurer in defending our insureds.”
AIG is now applying this split to its professional liability policies and any policy that has third party liability.
Clients have welcomed the changes despite the cost implication of having increased cover, says Knell, as they prefer to have certainty and to operate their business effectively without obstacles.
By the next renewal cycle at the end of June all AIG clients should be covered under the new D&O policy structure.
While the high profile cases have raised awareness about the risks involved to potential directors Knell says more is needed among SME businesses.
“There’s still a tendency in New Zealand to look at this being a big company’s exposure, and the reality is it’s not.
The kind of exposures seen by smaller companies will generally speaking be supplier claims, issues with creditors, regulatory issues, etc. but they probably don’t retain the kind of legal counsel required to address those issues.”
Knell said the AIG small business D&O policy, Private Edge, has been a fast-growing market over the past 4-5 years via their regional intermediaries.
