Joining a board, watching a capital raise approach, or seeing a competitor hit with a shareholder claim tends to force the question of directors and officers (D&O) insurance onto the agenda. A director makes dozens of decisions a week on limited information, often under time pressure, and the law holds them personally responsible for how those decisions are made, not just for whether they worked out. Hindsight does not protect a director who made a reasonable call that later looks wrong, which is why the insurance question deserves to be answered before a claim arrives rather than after. The cost of getting it wrong is not a corporate loss written off in the profit and loss statement: it can be a demand on the director personally, in a claim the company's own assets cannot cover.
Your options for managing director liability
There are three broad ways to deal with the personal exposure that comes with being a director. The first is to rely on the company's indemnity: many companies promise, usually in the constitution or a deed of indemnity, to cover a director's legal costs and liabilities. The second is to take out D&O insurance, under which an insurer pays defence costs, settlements and judgments within the policy's limits. The third is to do nothing and wear the risk personally.
These are not clean alternatives, and the option many directors assume will catch the shortfall, the company indemnity, is limited by statute. Under s 199A of the Corporations Act 2001 (Cth) (the Act), a company cannot indemnify a director against a liability owed to the company itself, against certain civil penalties, or against a liability to a third party that did not arise from conduct in good faith. Insurance fills some of that gap, but the Act restricts what premiums a company may pay as well. Section 199B stops a company from paying a premium for cover against a wilful breach of duty or a contravention of the misuse-of-position and misuse-of-information duties in ss 182 and 183. The real question is therefore not whether to hold a policy, but what scope of cover matches the conduct your directors can realistically be accused of.
What to weigh up
What a D&O policy covers
At its core, D&O insurance pays the defence costs and settlements of proceedings against directors and officers for decisions made in the course of their duties. Policies are usually structured in layers, and it helps to know which layer does what:
- Side A cover: pays for the director's own liability and defence costs when the company cannot or will not indemnify them, including defence costs, damages, interest and costs awarded against the director.
- Side B cover: reimburses the company for money it spends indemnifying its directors under a deed of indemnity.
- Side C cover: responds to securities claims against the company itself, such as a shareholder class action over disclosure.
Policies are usually arranged to cover past as well as present directors, because claims can surface long after someone has left the board. That matters in practice: the duty not to misuse information under s 183 of the Act continues after a person stops being an officer. Many companies buy run-off cover so that a departing director is not left exposed to claims about decisions made years earlier.
The claims that policies respond to take a range of shapes. A shareholder class action over a disclosure failure, a creditor's claim after an insolvent collapse, a civil penalty proceeding brought by ASIC, or a dispute with a former executive over the way they were removed can all land on a director personally. The common thread is that the conduct alleged sits within the scope of the director's duties, which is the line that separates a covered claim from an excluded one.
The duties behind your personal exposure
The exposure that D&O insurance responds to comes mostly from Part 2D.1 of the Act, which sets out the general duties of directors and other officers. The core obligations are:
- Care and diligence: under s 180, a director must exercise their powers and discharge their duties with the degree of care and diligence a reasonable person in their position would exercise. This is a civil penalty provision.
- Good faith and proper purpose: under s 181, a director must act in good faith in the best interests of the corporation and for a proper purpose.
- No misuse of position or information: under ss 182 and 183, a director must not improperly use their position, or information obtained through their role, to gain an advantage or cause detriment.
A director who makes a business judgment in good faith, without a material personal interest, after informing themselves, and with a rational belief that it is in the company's best interests, is protected by the business judgment rule in s 180(2). But the protection only goes so far. The duties are enforced through civil penalty proceedings, and a breach can also expose a director to compensation claims. The same conduct can be criminal: s 184 makes it an offence to act recklessly or dishonestly in breach of the good faith, use of position or use of information duties. Insurance responds to the financial consequences of these exposures, not to the reputational damage or the disqualification risk that can follow a finding against a director.
Separately, s 588G makes a director personally liable to compensate the company for debts incurred while it was insolvent, if there were reasonable grounds to suspect insolvency at the time. ASIC has published guidance for directors on complying with this duty, and insolvent trading is a common trigger for claims when a business fails. This is one reason D&O cover matters most to companies whose cash position is under stress: the risk is greatest precisely when the company may not be able to back its own directors.
What insurance will not cover
D&O policies are liability policies, not guarantees. Insurers do not cover conduct that is deliberate or dishonest:
- Claims arising from fraud, dishonesty or wilful default are excluded from cover.
- Under s 199B of the Act, a company cannot pay a premium for insurance against a wilful breach of duty, or against a contravention of the misuse-of-position or misuse-of-information duties.
- Civil penalties are generally only covered to the extent permitted by law. In ACCC v BlueScope Steel Limited (No 6) [2023] FCA 1029, the court ordered an officer to pay his pecuniary penalty personally and not claim it under the company's D&O policy, on the basis that insurance would strip the penalty of its deterrent effect.
Nor should a policy be treated as permission to cut corners. Cover responds to decisions made in the course of duties, not to conduct that knowingly breaches the law. In practice, an insurer will investigate whether the alleged conduct falls within the policy's definition of a covered claim before it pays, and an exclusion that looked like fine print at signing can decide the whole matter years later. The exclusions are worth reading carefully precisely because they define the boundary of the protection.
How risky is your company's position
Whether the premium is worth paying turns on how likely it is that a director will face a claim. Some situations push the risk up:
- Highly regulated industries: more regulators, more disclosure obligations and more scope for enforcement action.
- Raising capital or listing ambitions: investors and shareholders can bring securities claims about disclosure, and plaintiff firms fund class actions around them.
- Overseas operations: directors of Australian companies with foreign subsidiaries answer to more than one regulator.
- Financial distress: insolvent trading claims tend to follow a company that fails while trading.
- Major change: mergers, acquisitions and restructures concentrate big decisions into short time frames.
Regulatory attention often precedes private claims. ASIC's enforcement focus on areas such as cyber resilience and climate disclosure has been widening in recent years, and a regulatory investigation can be expensive to respond to even where no claim eventuates. Some policies respond to investigation costs, but this varies and should be checked in the wording.
Industry commentators point to emerging risk areas that are pushing claims beyond the traditional securities dispute. Cyber incidents, supply chain issues touching modern slavery and human rights, money laundering failures, and climate and ESG disclosure are all areas where directors have recently faced increased scrutiny, and where a regulatory finding can open the door to follow-on private claims. A company active in any of these areas should factor them into the risk assessment rather than assuming its existing cover automatically responds.
The cover details worth negotiating
Once the decision to insure is made, the work shifts to the wording, because policies differ far more than the sales brochure suggests. The details worth pressing on are:
- The definition of claim: does it cover a regulator's investigation notice, or only formal proceedings?
- The definition of defence costs: which lawyers can be used and what counts as a covered cost.
- The conduct exclusions: how the policy defines fraud, dishonesty and wilful default, and who decides whether they apply.
- Side A limits: if the company is insolvent it cannot fund an indemnity, so the direct cover for directors matters most then.
- Retroactive cover and run-off: whether the policy covers conduct before inception and directors who have left.
Premiums and available scope move with the insurance market, and in recent years more insurers have entered the Australian D&O market competing for business, with premiums softening. That makes it a reasonable time to shop the cover, but the cheapest policy is rarely the best value. The insurer's claims-paying record and the breadth of the wording matter more than the premium.
How an Artificer Legal lawyer can help you weigh up D&O cover
The decision is usually made without anyone reading the policy. An Artificer Legal practitioner can change that. Before you buy, we can review the proposed wording against your company's actual risk profile, flag the exclusions that would bite in a realistic claim scenario, and stress-test whether the limits and Side A structure are adequate. We can also check that your constitution and any deed of indemnity line up with the policy, because the two interact: the deed determines what the company will pay, and the policy determines what the insurer will pay when the company cannot.
If a claim or an ASIC investigation arrives, the value of having had the policy reviewed becomes apparent. We can help directors understand the duties engaged, respond to the regulator, manage the insurer's conduct of the defence, and work through whether any part of the exposure falls outside cover. Where a claim is denied, we can assess whether the insurer's reliance on an exclusion is correct and how the policy should respond. Getting that advice before a claim crystallises is far more useful than trying to reconstruct what the policy meant after the demand letter arrives.
Match the policy to the conduct your directors face
One idea is worth keeping. The decision is not whether directors make mistakes; they do, and the law does not expect perfection. It is whether the cover you buy responds to the conduct your directors can realistically be accused of, and the answer lives in the policy's definitions and exclusions, not its marketing. A policy that reads well in the brochure but excludes the claims most likely to hit your industry is cover in name only, and the company indemnity that everyone assumes will catch the shortfall is limited by the Act.
To recap: directors owe the duties in Part 2D.1 of the Act and can be personally liable, including for insolvent trading under s 588G. D&O insurance pays defence costs and settlements for decisions made within the scope of those duties, but not for fraud, dishonesty or wilful default, and not for penalties that courts or the Act keep outside cover. Policies usually extend to past and present directors, and are worth arranging while the risk is still hypothetical, so that a reviewed policy is already in place on the day a claim arrives.