Weighing up individual risk

Directors and senior employees of corporates are increasingly coming under the spotlight of regulatory authorities such as the Commerce Commission and the Securities Commission leading to prosecutions against both organisations and the individuals involved. When was the last time you considered whether the individuals in your organisation were adequately protected from third party claims or prosecutions arising from acts or omissions in carrying out their duties to the organisation? The negative impact the prosecution of individuals can have on an organisation should not be underestimated. Failure to adequately protect individuals could lead to difficulties in recruiting at top levels and can damage morale.

There are limits on what an organisation can do to protect individuals. No matter what the organisationÕs views of the merits of a claim against an individual, because of limitations imposed by legislation, it may be unable to offer assistance to individuals who require it. For example, an individualÕs inability to fund their own defence costs could lead to a decision not to defend charges which is based on the financial costs of a defence rather than the merits of the prosecution.

While the first step must be to reduce the risk of claims, you should also consider what insurance or indemnity arrangements might be appropriate. If insurance is in place, consider whether the cover is likely to respond to possible claims (for example, most policies exclude claims in relation to pollution incidents and bodily injury but extensions are available, at an additional cost).

If you are considering recommending that the organisation provides indemnities or effects insurance for directors or employees, you will need to ensure that the relevant statutory provisions are complied with (for example, s162 of the Companies Act, s80A of the Commerce Act, s561 of the Health and Safety in Employment Act). Under the Companies Act, in essence, indemnities may be provided in respect of liability and defence costs except where the liability is criminal liability or the defence costs are incurred in relation to criminal charges where the individual is not acquitted. Insurance similarly may be effected in relation to liability, other than criminal liability, and defence costs other than those incurred in unsuccessfully defending a criminal charge. However, where insurance is effected for an individual other than as permitted by s162, the consequence is that the individual will be liable to the company for the costs of effecting the additional cover (premiums and any brokerage costs) except to the extent that he or she proves the costs were fair to the company. Importantly, the insurance is not rendered void (in contrast to an unpermitted indemnity).

As a consequence, in some circumstances directors and employees have been asked to contribute to the costs of effecting the insurance but in others, insurers and brokers have provided confirmation that the additional cover (generally to cover defence costs in criminal cases) is provided at no cost. Such inquiries should be made at the time of effecting the insurance. If you are unsure about this, seek expert advice.

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