The ongoing Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (“Royal Commission”) has attracted great media attention for much of 2018. In the insurance world, this has prompted a shift in insurers’ attention to policies that may respond to claims arising from the Royal Commission.
The Royal Commission was established to examine potential misconduct by Australia’s financial services entities, whether there are sufficient mechanisms in place to compensate victims, and ways to minimise future misconduct.[1] Unsurprisingly, the string of activities and findings have sparked a reaction from insurers. Already stung by the impacts of the surge in securities class actions (D&O securities class action claims and reported circumstances are currently exceeding the total insurance market premium pool by a significant margin[2]) insurers are now looking for ways to further limit their exposure.
Restricting cover through a “Royal Commission Exclusion”
“This is very much an evolving issue. Some insurers have already started to restrict cover by imposing Royal Commission exclusions under certain Directors and Officers Liability and Professional Indemnity policies in an attempt to limit their exposure to potential losses and claims arising from the Royal Commission. Evidently, the first clients to be impacted are those in the financial services sector who have been directly impacted by the Royal Commission,” says Richard Garside, National Financial Institutions Practice Leader at Marsh.
Garside goes on to explain that given the broad scope of the Terms of Reference[3] and the volume of evidence and testimonies considered at the Royal Commission, the scope of an insurer’s Royal Commission exclusion is likely to significantly erode coverage provided under the respective policy.
“If the wording of the exclusion is not confined to specific matters applicable to the relevant financial institution insured under the policy, then testimonies or documents produced by one financial institution could impact the insurance coverage of another financial institution. It would be very difficult to clearly ascertain what is actually excluded given the volume of material and evidence presented at the hearing,” explains Garside.
The adverse findings which were open to the Royal Commission were wide ranging – breaches of the Corporations Act, the ASIC Act and the Credit Act – which are the very “Wrongful Acts” that a PI policy is intended to cover with respect to a financial institution. Similarly, directors and officers will be relying on their D&O policies (and potentially also PI policies) for coverage in relation to such breaches. Eg. Royal Commission findings for inadequate systems and policies would be of particular concern for those directors or officers who hold such responsibilities.
A D&O or PI policy could potentially provide little to no cover if Royal Commission exclusions were imposed for both past and future claims. Even if the exclusion confines known risks to prior policy periods, the uncertainty of its implications undermines the coverage provided under the policy.
In addressing the needs of clients who are impacted, Marsh engaged with experts to review the implications of such exclusions as well as tapping into new markets to explore alternative solutions.
“It is our view that Royal Commission exclusions should generally be avoided. And where they cannot be avoided, it’s important that the client has a clear understanding of the implications,” says Garside.
Practical tips for boards
For directors, officers or companies impacted by the Royal Commission, Marsh recommends consideration of the following:
- Notification of circumstances – Broadly notify insurers of circumstances which may give rise to a claim coming out of the Royal Commission. Considerations should also be given as to whether the notification should include any other circumstances which have not been considered in the Royal Commission, that may or may not later be presented before the Commission.
- Understanding Royal Commission Exclusions – Avoid the imposition of a Royal Commission Exclusion under your policy where possible. If not possible, ensure you have a good understanding of the implications on coverage moving forward.
- Exploring alternatives – Speak to your broker on the wider implications of the Royal Commission, exploration of alternative coverage options and new markets where appropriate.
Looking ahead
Strained by the impacts of growing shareholder class actions and additional implications from the Royal Commission, the general state of Australia’s financial and professional lines insurance market remains in a state of flux.
Consideration needs to be given to the changing dynamics in the insurance market and the impact this has on the scope of coverage terms and conditions available to insureds. I.e. Premium and deductible levels continue to rise following sustained periods of low premiums and increased claims frequency/severity; competition and alternative options for insureds dwindle following significant M&A activity amongst insurers in recent years; implications of Royal Commission exclusions under insurance policies remain uncertain and their practical applications are yet to be tested.
The value and coverage afforded under a D&O or PI policy will become highly questionable should Royal Commission exclusions become an established part of policy wordings.
The information contained herein is based on sources we believe reliable, but we do not guarantee its accuracy. Marsh makes no representations or warranties, expressed or implied, concerning the application of policy wordings or of the financial condition or solvency of insurers or reinsurers. The information contained in this publication provides only a general overview of subjects covered, is not intended to be taken as advice regarding any individual situation, and should not be relied upon as such. Statements concerning legal matters should be understood to be general observations based solely on our experience as insurance brokers and risk consultants and should not be relied upon as legal advice, which we are not authorised to provide. Insureds should consult their own qualified legal advisors regarding specific coverage and other issues. Marsh Pty Ltd (ABN 86 004 651 512, AFSL 238983) arrange the insurance and is not the insurer.
Copyright 2018 Marsh Pty Ltd. All rights reserved.
[1] www.theguardian.com/australia-news/2018/apr/20/banking-royal-commission-all-you-need-to-know-so-far
[2] Marsh, Directors & Officers Liability Insurance Market Update, May 2018
[3] https://financialservices.royalcommission.gov.au/Pages/Terms-of-reference.aspx
