Moves to reduce individual directors’ liability for corporate fault should cut risks in directors’ and officers’ (D&O) cover and lead to cheaper premiums.

NSW is leading the way with legislation to clarify that corporations, not directors, should be held liable for criminal conduct in most cases.

Clayton Utz Partner Peter Mann and Special Counsel David Gerber, writing in KPMG’s annual General Insurance Industry Survey, released last week, say directors will welcome the amendments.

The changes will reduce the number of directors’ liability provisions in NSW statutes from more than 1000 to less than 150.

Plans announced by NSW Premier Barry O’Farrell to amend laws that impose personal liability for corporate fault will bring the state into line with the Council of Australian Governments’ (COAG) Personal Liability for Corporate Fault guidelines.

The guidelines say a corporation should be held liable in the first instance for contravening a statutory requirement.

COAG also says directors should be held criminally liable for the misconduct of a corporation only if there are compelling public policy reasons, if liability of the corporation alone will not sufficiently promote compliance or if it is reasonable in the circumstances.

If other states and territories follow suit, the number of statutory provisions that impose personal liability for corporate fault is likely to be reduced, but there is no evidence a nationally consistent approach to directors’ liability will emerge, the Clayton Utz lawyers say.

“If the reduction in the number of offences to which directors’ liability provisions apply reduces the number of proceedings against directors, then this may be raised as an argument for reducing premiums.”

In a review of D&O cover issues, Mr Mann and Mr Gerber say uncertainty remains as to whether New Zealand’s Bridgecorp decision, currently under appeal, could set a precedent for Australian courts and jeopardise directors’ access to defence costs.

After the collapse of Bridgecorp, directors asked their D&O insurer to cover defence costs, but shareholders seeking more than $NZ450 million ($359 million) from the directors asserted a charge over the D&O policy proceeds.

The NZ High Court ruled shareholders were entitled to all proceeds of the policy before directors, forcing D&O insurers to introduce “costs-only” policies in response.

Another issue identified by Mr Mann and Mr Gerber concerns beneficiaries of D&O policies. They say it may affect whether the Bridgecorp decision will apply in Australia.

D&O policies are usually bought by a company for the benefit of directors. Under Australian law the company is the insured and the directors are most likely non-party beneficiaries.

Mr Mann and Mr Gerber say NSW law applies to anyone who has “entered into a contract of insurance”, meaning it could be argued a charge cannot be applied to a non-party beneficiary such as a director.

“Until such time as this (or another) argument persuades an Australian court not to adopt the same approach as the New Zealand High Court in the Bridgecorp case, uncertainty remains,” they say.

“The D&O policy is one of a director’s first, and probably most important, lines of defence against allegations of wrongful conduct and potential personal liability when a company is unable to indemnify its directors.

“A lack of certainty on an issue of this nature may continue to cause concern for some time to come.”

There may also be a renewed focus on D&O cover for fines and penalties, which often applies “to the extent permitted by law”. It is often unclear to what extent the law permits insurance for fines and penalties, according to the report.

Common law has traditionally prevented insuring fines, so offenders cannot escape the consequences of criminal conduct. But an opposing view says courts should respect the wishes of parties contracting privately.

“Insurance ought not to be provided to those who intentionally breach statutes or whose conduct involves fraud or recklessness,” Mr Mann and Mr Gerber say.

“However, cover should be available for strict liability offences in which there has been no relevant misconduct by the insured.”

The report says that with fewer directors’ liability offences, largely confined to cases in which directors can influence the actions of their companies, the extent of D&O cover for fines and penalties may be reduced.

The lawyers expect brokers will argue D&O rates should be reduced as a result, although underwriters may be cautious.

The past year has been an interesting time for the D&O insurance market, and directors “will be hoping 2013 brings some certainty to this issue”.