CILA /AIDA Congress Lisbon, May 8-10 2013

CILA /AIDA CongressLisbon, May 8-10 2013 D&O Insurance 3 Hot Topics: Defence Costs, Corporate Insolvency and Emerging Economies by Dr Adolfo Paolini University of Buckingham and DACBeachcroft LLP

The Nature of D&O Insurance Directors’ and Officers’ Liability Insurance has originally been developed to cover the liabilities that Directors and Officers may incur for breaching their duties to the corporate body

D&O Main Features • Developed to protect Directors and Officers and not the Company • Liability Insurance: Professional Indemnity Insurance/Third Party Insurance • Liability must be established to trigger substantive cover • Claims Made Policies • D&O does not cover wilful misconduct/fraud • D&O does cover regulatory investigations • Types: Side A , Side B and Side C

Defence Costs: The Steigrad’s Experience 1. The case regards to two insurance policies: D&O Side A with $ 20 million limit and SL policy with a limit of $ 2 million. 2. Both policies provided for the payment of defence costs incurred either by the insurer directly or with its consent in relation to any claim to which the policy applied. 3. The New Zealand Law Reform Act 1936. Section 9(1) creates what it describes as a “charge” in favour of a third party on insurance monies paid or to be paid to indemnify an insured in respect of the insured’s liability to that third party

The Steigrad’s Experience 4. A group of companies went into receivership and liquidation 5. Insured Directors claimed defence costs reimbursement from the D&O insurer. 6.. The insurer had previously been notified by a third party as to its right under section 9 of the Law Reform Act 1939 7. The insurer withheld payments until a declaration from a court had been obtained. 8. Consequently the directors sought a declaration that the charge did not apply to defence costs cover.

The Steigrad’s Experience 9. The High Court agreed with the Third Party and concluded that S 9 applied 10. Court of Appeal quashed the first instance decision and decided that s 9 applied to the substantive cover of liability and not to the defence costs cover.

D&O Implications/Conclusions • Recovery of defence costs where the underlying claim is excluded from cover • A single undertaking? • Detachment of Defence Costs Cover • Unambiguous Wording

D&O: Corporate Insolvency/ The Policy as Company’s Asset BOFI v Babcock & Brown [2011]NSWSC 1382 • BOFI managed a Syndicated Facility Agreement. They lent 3 Billion Aus $ • The Borrowers were insolvent with the exception of Babcock & Brown. • D&O insurance covering Babcock & Brown liability

D&O: Corporate Insolvency/ The Policy as Company’s Asset 4. The agreement contained a clause whereby the borrower had to provide all relevant information regarding the assets of the Company 5. D&O Policy contained the following clause: “Confidentiality The Insureds shall make all reasonable efforts not to disclose the existence of this policy to any person except to professional advisers or as required by law or court order and shall only state within the C’s annual report that the C has agreed, or otherwise, to pay a premium for this policy but shall not publish the nature of the liability covered by this policy, the name of the Insurer, the Limit of Liability or the premium for this policy”

D&O: Corporate Insolvency/ The Policy as Company’s Asset 6. BOFI sought a declaration order that it had the right to see the policy, as company’s assets ( Clause 2) 7. Defendant contended that the D&O policy was not an asset and in any event they could not disclose its content. 8. Court held: D&O policy was an asset of the company since it provided Side B cover. Therefore clause 2 was triggered.

D&O Implications/Conclusions • Who is really protected under a D&O Insurance policy? • Subrogation Rights/ Third Party may circumvent contractual restrictions. • Should the company be a party or a third party? • Should we retain its integrity?

D&O: Emerging Economies/The Chinese Example • Directors must exercise the powers stipulated by the company's articles of association • Directors assume the duties of loyalty and diligence to the company • Standard of Care is not established. Breach of Liability lead to compensation • Conflict of Interests and Account for Profits • SL Art 69 similar to that in FSMA 2000 s 90

D&O: Emerging Economies/The Chinese Example 5. Directors do not have voting rights where their liability is assessed in general meetings/ duty to provide information 6. Holders of 1% of Capital can request from board of supervisors legal actions against executive directors. They can also personally sue supervisors (non-execs) 7. Shareholders could bring personal actions against directors where breach affects their interests 8. Non- Executive Directors/ Supervisory Board 9. Controlling Shareholders of a bidding company could be liable to the shareholders of the target company. SL Art 214

D&O Implications/Conclusions 1. Advantage: the concept of fiduciary duties have been taken from common law. 2. The Board of Supervisors and D&O Cover 3. Directors’ Personal Liability to Shareholders 4. The Meaning and Liability of Controlling Shareholders 5. Controlling Shareholders’ Liability to the shareholders in the target company (Takeovers)

D&O Implications/Conclusions 6. State-Owned Companies and D&O Insurance 7. Foreign investment Companies and D&O Insurance. Jurisdiction Clauses and Choice of Law. 8. Hierarchy: Directors, Supervisors, Senior Managers 9. Commissions v Bribes 10. Market Size and Insurance Capacity

D&O Implications/Conclusions • Attractive Market • Developing at a high pace • D&O exposures could be seriously large/ State-Owned Companies

Thank You adolfo.paolini@buckingham.ac.uk apaolini@dacbeachcroft.com

CILA /AIDA Congress Lisbon, May 8-10 2013