Temporary changes to prevent opportunistic shareholder class actions over company coronavirus disclosures are unlikely to bring relief to the directors’ and officers’ (D&O) insurance market, Marsh says.
The Federal Government said this week that companies and officers will only be liable for a disclosure breach if there has been “knowledge, recklessness or negligence” regarding price-sensitive information.
Marsh Head of Finpro Craig Claughton says the change is welcome and will give directors and officers some breathing space as they guide companies through the pandemic, but it does not address the broader landscape.
“Unfortunately, it is going to do little to vary insurers’ approach to skyrocketing D&O insurance premiums,” he told insuranceNEWS.com.au.
“Companies and insurers are swamped with large claims. As a result, insurers are likely to continue to charge the higher premiums they deem necessary to be able to underwrite this class of business.”
Figures from Marsh reveal some listed companies experienced rate increases of more than 100% for directors’ and officers’ cover in the March quarter.
Mr Claughton says COVID-19 has become another risk item on the radar as part of underwriters’ review processes.
“All insurers have certainly asked deep and probing questions to better understand how a client has and continues to manage this,” he said.
Treasurer Josh Frydenberg says the new rules, effective for six months from yesterday, reflect the difficulty of releasing reliable forward-looking guidance to the market at this time.
“The heightened level of uncertainty around companies’ future prospects as a result of the crisis also exposes companies to the threat of opportunistic class actions for allegedly falling foul of their continuous disclosure obligations if their forecasts are found to be inaccurate,” he said.
The Federal Government earlier this month said class action litigation funders are to be required to hold an Australian Financial Services Licence.
“This is a good first step to introducing some regulation to ensure that the majority of settlement proceeds go to plaintiffs,” Mr Claughton said.
The disclosure rule change was made through an amendment to the Corporations Act as part of the Government’s response to the pandemic.
The Australian Industry Group says the temporary change will protect businesses against speculative class actions.
“For companies, providing earnings guidance and forward-looking information about their performance that does not infringe Australia’s strict disclosure rules presents managers and company boards with an extremely difficult task at this time,” CEO Innes Willox said.
Blog Submission: Peter Sellwood
PALTD InsureRight – Insurance & Risk Management
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