Directors’ and officers’ (D&O) insurers have been advised to look carefully at the recent court case judgement against former directors of the failed Centro property group.

“They will be worried by the implications of this judgement,” Wotton & Kearney Partner Patrick Boardman said.

“Profit forecasts and financial accounts are probably the predominant cause of D&O liability in Australia.”

The court case centred on the Centro board approving a set of accounts which did not disclose debts of about $2.6 billion as well as about $1.75 billion of guarantees for a US subsidiary.

Centro’s internal accounting team, auditors and management approved the accounts but none admitted spotting the omission.

The case brought by the Australian Securities and Investments Commission (ASIC) argued the directors had breached the Corporations Act, under which they are required to give a true and fair view of Centro’s financial position.

The court agreed with ASIC that the directors should have spotted the omission, and dismissed the defence that understanding the complexity of the accounts was onerous.

Mr Boardman says D&O insurers will need to work with the companies they insure to minimise the risk of breaches of the Corporations Act regarding financial accounts.

He says insurers should “seek to transfer the risks associated with the accuracy of financial accounts to the auditors, rather than the directors”.

This should include directors and officers having a basic understanding of relevant accounting principles, creating a checklist of significant financial information and the issues as well as reviewing accounts line-by-line.

However, the greater scrutiny of directors and officers is not expected to push up rates in the sector. 

Nova Underwriting MD Malcolm Fletcher told insuranceNEWS.com.au the D&O market is “overwhelmed with capacity”.

“The market is soft so absolutely nothing will happen,” he said. “I will be very surprised if there will be any changes to policies.” 

Centro’s D&O broker, Marsh, declined to comment on the case when approached by insuranceNEWS.com.au.