As a very common date for insurance policies to fall due, the end of financial year is an opportune time to ensure that your professional indemnity coverage is not just compliant with the requirements of ASIC RG258, but also broad enough to indemnify you for the types of claim scenarios that you might face as a Registered Liquidator.
To help decipher the requirements and optional coverages available, we’ve prepared a simple guide that you can refer to while reviewing your insurance needs to make sure that your coverage is up to the task.
Coverage Essentials
RG258 requires that PI policies for Registered Liquidator meet certain specific criteria beyond what an insurer’s standard professional indemnity policy typically allows for. We have summarised the specific requirements of each below and recommend that you review your policy schedule and wording to ensure these are met:
- Limit and Costs cover – your policy limit should, at minimum, align with the relevant limitation of liability scheme of which you are a member, and your policy must provide for defence costs in addition to this limit.
- Run-off – your policy should not contain any clause that reduces or terminates cover in the event of your firm’s insolvency. In fact, the guide specifically prescribes that in this eventuality, your policy should include at least one year of automatic run-off cover if this were to occur.
- Cancellation – your policy must not be cancellable by you, nor by the insurer in the event of innocent non-disclosure.
- Excess or deductible – your excess must be less than the greater of $10,000 per principal or 3% of gross fee income, as well as less than 5% of your PI limit.
- Reinstatements – your policy must include at least one automatic reinstatement of the policy limit (which may be referred to as an ‘aggregate’ limit of liability of 2x the limit amount).
- Fidelity – your policy must include an ‘adequate and appropriate’ amount of fidelity cover, which in this context relates to theft of appointment funds in your control (as opposed to your own firm’s funds). Consideration should be given to the amount of such funds you hold at any given time.
Important Inclusions and Coverage Extensions
Whilst RG258 sets a minimum basis of coverage for your policy, there are quite a few other exposures that should be captured within your policy in order to properly protect you from potential claims:
- Personal Costs Orders – personal costs orders are orders made against a Registered Liquidator in their personal capacity, and as such, must be included within your firm’s professional indemnity insurance as by their very nature, are not indemnifiable from the funds in a specific liquidation, or they are but there are insufficient funds with which to pay. These differ from Adverse Costs Orders on this basis. Adverse Costs Orders made against a liquidator acting for creditors of an insolvent company should be met by either an indemnity from a secured creditor, funds in the liquidation, a litigation funder, or a standalone After the Event / Adverse Costs Order insurance policy – which is taken out under the appointment, not in the firm or Liquidator’s personal capacity.
- Non-indemnified claims – this should be captured within your professional indemnity policy if you become liability to pay a claim that would ordinarily be indemnified by a secured creditor but for whatever reason they refuse to do so, leaving you on the hook.
- Trading Debts – this is a common exclusion in most PI policies that will need to be deleted so if you incur trading debts or guarantee such debt under an appointment, you are able to receive indemnity under your policy.
- Public Relations Expenses – this allows for you to claim from your PI policy for the costs associated with paying a public relations consultant to help limit adverse effects following an event that you believe may cause reputational harm to the firm.
What should my PI cover NOT include?
It sounds strange but we would actually recommend that certain extensions and add-ons that are commonly available in the market not be included within your professional indemnity insurance. That isn’t to say that you should not consider insuring against these risks; but that you should cover them elsewhere under a standalone and specific policy that is designed to provide the broadest cover available.
Why is that?
The main reason is to preserve your PI policy for what it is intended for – indemnifying you for compensation claims arising from a failure to discharge your professional duties or in the event of your negligence. By “bundling” too many other extensions into your PI policy, you run the risk of both not carrying sufficient cover for legitimate standalone exposures but also jeopardising your claims history and risking premium increases at renewal of your PI policy, remembering that PI is a policy you have to carry in order to run your business.
We would recommend the following policies be considered in addition to your professional indemnity insurance:
- Cyber – a standalone cyber policy will provide cover for losses arising from cyber breaches, whether accidental or malicious, as well as providing indemnity for first party losses (such as incident response costs, funds theft, ransom payments and extortion, IT security and forensic costs and other costs associated with data restoration and remediation including business interruption), third party costs (such as privacy and network liability and credit monitoring costs) as well as regulatory costs (fines and penalties and mandatory notification costs). Most cyber extensions to PI policies only capture third party costs arising from your business activities and are not as broad as a full cyber policy.
- Statutory liability – a standalone statutory liability policy will indemnify you in the event that you receive a fine or penalty arising from a legislative breach. Whilst in recent times, cover under statutory liability policies for “white collar” industries has reduced as WHS fines and penalties are no longer able to be insured in many jurisdictions, our recommendation is that this exposure is better covered under its own policy.
- Litigation Adverse Costs (a.k.a. After the Event Insurance) – any adverse cost liability associated with a Registered Liquidator pursuing litigation against directors should be procured in the capacity as agents for the entity over which the Liquidator is appointed and not captured under the firm’s own PI insurance. Transferring this risk can also be achieved with the assistance of indemnities from Appointors and Litigation Funders, however if these avenues are not available then a standalone After the Event insurance policy is recommended. It is important to understand the distinction between Adverse Cost Orders and Personal Costs Orders in this context: the former being the costs awarded should a genuine litigation be ultimately unsuccessful whereas the latter is a cost order against a Liquidator for what a court may deem to be a spurious litigation being pursued, in which costs cannot be recovered under the appointment or from an indemnity and are awarded against the Liquidator personally.
If you have any questions or would like any advice on your own professional indemnity arrangements, please do not hesitate to reach out to me or your local WTW Insolvency & Restructuring contact
