Cost of insuring against directors' liability more than doubles for dual-listed companies

The cost of insuring directors and officers' of dual NZX and ASX-list companies has shot up. Photo/123RF.

Some New Zealand companies are paying more than double what they were paying a year ago to cover the potential liabilities of their directors and officers as a result of rising numbers of class actions and fall-out from Australia's banking inquiry.

Felicity Caird, general manager of the governance leadership centre at the Institute of Directors, said it began looking into the cost of directors' and officers liability insurance (D&O insurance) after hearing about increases in Australia last year.

"There is definitely some organisations paying more than double."

Caird said the cause was increasing class action and litigation in the wake of the Australian inquiry into the financial services industry.

"Insurers are looking at the risk for companies. In the current environment the financial industry is under the spotlight and being listed on the ASX [as well as the NZX] feeds into the risk profile."

Felicity Caird, Institute of Directors manager for governance leadership centre. Photo / Supplied.

The Australian reported on Monday that a 400 per cent rise in directors' liability insurance was now spilling over from the banking and financial services sector into other industries.

According to the newspaper the four major banks - ANZ, Westpac, National Australia Bank and Commonwealth Bank of Australia - who also own the major banks in New Zealand - are facing a combined 23 class actions, and more are likely.

Those class actions include the one being taken against ANZ in New Zealand by investors of the failed Ross Asset Management ponzi scheme.

Steve Walsh, chief client officer at insurance and risk broker Marsh, said he was seeing different levels of price rises for New Zealand companies listed on both the NZX and ASX to those just listed on the NZX and private companies/government entities.

"For dual listed ASX/NZX companies there is a lot of contagion between what is happening in Australia and here."

Walsh said he had just dealt with one case where the premium would have gone up by two and a half times.

"We were able to negotiate it down, but it has still gone up by double."

For a dual-listed New Zealand company the cost of D&O insurance could range between $500k and $2 million plus a year.

Walsh said even though action against a dual-listed New Zealand company would need to be taken in New Zealand, the risk of a class action had risen because of the increase in cases in Australia.

"The driver of all of this has been class-action claims."

He said 18 months ago the Australia arm of Marsh produced a report which found the average amount companies were facing for class action claims was A$55 million.

"The costs have just changed the class-action regime here on a number of claims."

The courts in New Zealand are also allowing some class actions to proceed on a basis that meant claimants don't need to opt in, they are just automatically included.

Insurers were not only facing big claims on the likes of Mainzeal, Feltex and CBL but they were concerned about the contagion risk from Australian class actions even though separate action would have to be taken in New Zealand.

"Insurers are looking at it and saying we are still not getting enough money for the risks because of the extensive legal cost involved."

"The other issue is the prevalence of litigation funders in New Zealand." Walsh said he had heard of at least seven here in New Zealand now.

But the increase for dual-listed companies was also flowing into the rest of the sector which he said was the same as what happened for house insurance after the 2011 Canterbury earthquakes.

He said data from the Insurance Council showed in 2018 there was over 1000 directors', officers' and statutory liability claims in New Zealand, adding up to around $30 million.

It was not just shareholders taking action against directors and officers, but creditors, employers and other stakeholders.

For NZX-only listed companies the costs were rising between 15 and 50 per cent.

"If you are paying $100k for premiums now, expect to pay $115k to $150k."

The amount of the increase depended on the risks to the company and the sector they were in, he said.

"If you have got a strong balance sheet, it depends on the sector. If it's in a benign property sector you might be okay but the financial sector is seen as much riskier."

"There is more scrutiny on risk, certainly at this level."

Walsh said five years ago the chief financial officer would have filled out a form, ticked the boxes, sent off the annual report, and got approval.

But insurers were now wanting to understand more about the risks - the experience of the directors, the conduct and culture, what was being done to mitigate climate change.

The particular area of the insurance which had gone up in price was called side C, which specifically covers class action.

Some directors are turning down roles at companies because there isn't enough insurance cover. Photo / File

Walsh said litigation funders knew there was money there to cover a claim by virtue of the insurance cover taken out.

For private companies the price rise was between 10 per cent 25 per cent, as those companies didn't typically need to take out side C as they were not publicly listed and didn't need to raise capital from the public.

He said the best advice for companies to reduce the cost was just to engage more. "It sounds really simplistic."

But he said insurers just wanted more information.

The New Zealand directors liability insurance market was also affected by its players. Last year global player Allianz pulled out of offering D&O insurance in New Zealand.

He said NZI, QBE and Vero were all Australian owned, which meant they were already being affected by what was happening in Australia, whereas others like Chubb and Berkshire Hathaway were American.

"Whatever happens offshore, if they catch a cold, we catch a cold."

Walsh said it was a serious issue and he knew some directors who had turned down roles because the companies had not had enough insurance cover for them to feel comfortable.

While companies were shocked by the increase, they were still buying it, he said.