The ongoing pandemic and deteriorating economy continue to cause financial stress for businesses across the country. With the Federal Government’s COVID-19 temporary insolvency relief arrangements set to end on December 31, 2020, a wave of bankruptcies is expected to occur. In an effort to enhance the survival rate of struggling businesses, the Federal Government announced a series of insolvency reforms which will come into force on January 1, 2021 (subject to the passing of legislation). In this article, we’ll explain how the current conditions are impacting Professional and Executive Liability policy exclusions and underwriters’ capacity to take on risk, and outline what the proposed insolvency reform package means for small businesses.
Current risk appetite & what this means for insurance
Even before the pandemic hit, Professional and Executive Liability underwriters experienced challenges when assessing businesses operating in underperforming industries. This has been further compounded in sectors severely impacted by the pandemic, such as travel. As a result, underwriters are more cautious about taking on risk.
As a consequence, reduced insurer capacity and increased premiums are a common experience for brokers and their clientele. In light of any financial distress, the application of an insolvency exclusion is becoming more common for D&O Policies and often found within a typical Management Liability program (unless underwritten back of out of policies, by way of audited financials being presented). The wording which is more commonly found identifies an exclusion in respect of cover for claims &/or losses arising from the insolvency of an insured organisation. Policy wordings can vary and use different language, which may determine how this exclusion is triggered. As such, clients are encouraged to seek advice from their Honan broker.
Directors and businesses who find themselves in financial distress, should consider the prospect of insolvency at board level. C-suites need to keep in mind that their duties acting in the capacity as a Director or Officer are to the entity itself and not necessarily to themselves. Gaining any protection from ‘safe harbouring’ provisions must not be the main focus for C-suites. If insolvency is suspected, C-suites should engage in proactive measures towards developing a pathway that the company can adopt, which may lead to a better outcome OR immediately appoint an administrator. If the insolvency reforms slated for January 1, 2021 come into force, companies with liabilities below $1m may look to adopt the ‘debtor in possession model’.
What are the proposed reforms?
Australia’s current voluntary administration requirements are designed for larger companies, and this process is complex and costly. In addition, under the current system, the Administrator takes over effective management and control of the company. All of these factors can discourage small and family run businesses (with liabilities below $1m) from entering the restructuring process.
Broadly speaking, the reform package will introduce:
- a new debt restructuring process to assist struggling but viable small businesses
- a simpler, faster and less costly liquidation process for small businesses
- complementary measures to assist insolvency practitioners manage the increased demand for liquidating and restructuring small businesses (e.g. a new classification of insolvency practitioners limited to performing the simplified process).
What do the reforms mean for small businesses?
Eligible businesses can continue trading in the ordinary course under the control of the owners while the restructuring plan is arranged. The owners will work alongside an independent practitioner on a restructuring plan and provide relevant financial information to the practitioner, enabling them to make arrangements with creditors and certify the plan.
We’re With You All The Way
While the situation is fluid, we are committed to keeping you updated as more information comes to light. We encourage you to contact your Honan insurance advisor to discuss your situation and address any questions or concerns.
Chief Executive Officer
Placement Manager – Professional and Executive Risks