Directors face growing legal action due to economic pressures and the rise of litigation funding, according to a new insurance industry report.
The report on directors and officers’ insurance, which covers personal legal liability, says claims are expected to increase.
Guy Beatson, general manager of the Governance Leadership Centre at the Institute of directors says this shows the insurance industry is anticipating more legal action against directors
“This is, in part, a reflection of the difficult economic times,” Beatson says in a statement. “Business liquidations are more than double their 2021 levels. This is rivalling the Global Financial Crisis in severity. At the same time, the rise of litigation funding is providing a new avenue for launching legal action.”
Produced by the Institute of Directors, with contributions from insurance broker and risk advisor Marsh and legal firm Dentons, D&O Insurance – the Shifting Sands of Risk says regulator activity, legislative change and the flow-on effects of recent court actions are also contributing to the heightened jeopardy for directors.
“From boardrooms to courtrooms, the expectations on directors have expanded significantly,” says Beatson.
“High-profile cases – including Mainzeal and Whakaari/White Island – and ongoing litigation around climate are testing the outer edges of director duties, reinforcing the need for diligence, oversight and resilience in the face of systemic and reputational risk.
Directors will also be closely watching AI governance overseas and noting that claims about AI use or capability are drawing increasing legal and stakeholder attention…
“Directors will also be closely watching AI governance overseas and noting that claims about AI use or capability are drawing increasing legal and stakeholder attention.”
Dentons Partner James Warren says health and safety presents a further source of legal dispute as some areas of the law remain unclear and the Government is developing new policy in this area.
“While the convictions of Whakaari Management Ltd – the owners of Whakaari/White Island – were quashed after the terrible tragedy, the High Court explicitly confirmed ongoing uncertainty about the ‘duty of control’ a director or owner may have when others are on their property,” says Warren.
“The Government intends to clarify this duty, alongside other changes such as reducing health and safety responsibilities for small, low-risk businesses. The devil for directors will be in the detail, and there are also potential amendments to director duties, more broadly, yet to be announced.”
Together, these factors have created a perfect storm of legal risk for New Zealand directors, says Beatson.
“We frequently hear feedback from our members that this is a topic of discussion in boardrooms,” he says. “So perhaps it is no surprise that, as the report notes, 95% of directors now have liability insurance.”
The full D&O Insurance – the Shifting Sands of Risk report is available here.
