Rising numbers of shareholder class actions have put directors’ and officers’ (D&O) policies under scrutiny amid fears combined limits may serve only to protect companies rather than their managers.

The problem has arisen because Australian D&O policies typically include company cover under a combined limit alongside protection for directors and officers.

Company cover, known as Side C, was introduced in policies in Australia in 1999 to provide cover for securities claims.

Rising shareholder class actions have raised concerns that directors could be left exposed should the company absorb the entire combined claim limit.

Speaking at the National Insurance Brokers Association (NIBA) Convention last week, DLA Phillips Fox Partner Sydney Peter Tredinnick outlined the risk.

“Claims don’t often crystallise at the same time,” he said. “Side C exacerbates the divergence in interest between the directors and the entity.

“Directors could be left to whistle if claims are subsequently made against them,” he said. “If there is no money left for directors then that goes against what a D&O policy is taken out for.”

Marsh Finpro Practice NSW Manager Craig Claughton said when Side C cover was introduced “there was a mindset that the majority of claims would concern the individual. That has not been borne out.”

Instead, an increase in the number of litigation funders has helped drive shareholder activism, putting unforeseen pressure on Side C cover.

“It is the most significant exposure facing directors today,” Mr Claughton said.

AIG has reacted by offering a separate Side C cover, while Zurich National Underwriting Manager Financial Lines Andrew Strain told delegates his company is currently evaluating its options.

“We have got to decide whether stand-alone cover for entities is a viable alternative,” he said.