11 June 2020

Business directors alert to elevated risks and insolvency fears should look to insurance

As the failure of Virgin Australia illustrates, local business boards are confronting the threat of insolvency in the face of reduced revenue and strategic uncertainty, according to a Company Director magazine article published 1 June. Company Director spoke with Gallagher National Head of Professional and Financial Risks Michael Herron, who stressed the need for boards to scrutinise their business’s insurance cover.

“In this environment there is enormous uncertainty for directors,” he says, advising boards to pay close attention to the fine print on insurance policies and ensure they do due diligence.

Directors of Australian businesses need to be alert to changing financial risks presented by falls in income as a result of the pandemic restrictions. Those in in the tourism, travel, events, hospitality and in-store retail sectors, professional sporting organisations and not for profits are most affected; prospects are more positive for financial services, health, online and digital-first businesses, according to Deloitte research.

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Many businesses impacted by drastic reductions in cash flow as a result of social distancing measures have made applications for government assistance, while others grappled with the complexities of JobKeeper paperwork as they tried to bridge the gap.

The reality is that reduced demand is likely to continue while the virus remains a threat, imposing liquidity constraints and forcing businesses to readdress their cost bases.

While the Federal Government’s temporary safe harbour provisions provide company officers and directors with breathing space, boards should use this respite to pre-empt liability risks, with particular focus on planning, negotiation, capital and expenditure. If the business is in distress and dealing with the possibility of insolvency its board needs to put the interests of creditors ahead of those of shareholders.


Applying an insurance lens to elevated insolvency risks

Under these conditions trade credit insurance protection against non-payment can play a critical role in preserving stability of working capital for businesses dealing with local and overseas markets.

Opportunities may present themselves in the form of mergers and acquisitions, both for sellers and buyers seeking to pivot their offering or operations. Transaction insurance can be invaluable in negotiations, with warranty and indemnity cover providing a solution when acquiring investment assets from distressed vendors, where there is uncertainty over their ability to meet their warranty commitments.

In worst case scenarios insurance for the insolvency space supports coverage in multiple areas of managing distressed accounts, right through to mergers and acquisitions.

Company directors should be conscious of their business’s exposures and apprise themselves of the scope of their management liability cover in terms of potential legal actions brought by external or internal stakeholders. A comprehensive insurance program could include directors and officers’ liability, statutory liability, employment practices, cyber risks and claims of criminal or improper behaviour.

Government regulatory reforms announced on 25 May aim to limit the difficulties of continuous disclosure obligations for directors dealing with incomplete or unverified information, since the time involved in a board conducting due diligence can be interpreted as a delay in disclosure.

“The consequences can be severe in COVID-19 conditions with so much economic uncertainty and financial market volatility,” Herron notes, saying the amendments will help provide relief to directors and reduce the likelihood of opportunistic class actions, but that they will need to apply longer term than the current six months to have an impact on directors and officers’ liability insurance premium pricing.

“For now we are talking to insurers about how the regulatory concessions allow directors to discharge their duties with more confidence in challenging conditions,” he says.

“Our focus is on keeping insurers at the table and negotiating the best outcome for each board case by case.”

Michael Herron, Gallagher National Head of Professional and Financial Risks


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Excerpts from the original article cited courtesy of the Australian Institute of Company Directors, published in Company Director magazine June 2020

Further reading 

https://www.ajg.com.au/corporate-insurance-solutions

Insurance market update: board governance and directors’ liability


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