Publications / Insurance and Risk

20 Jul 11
The Centro decision - impact on directors’ and officers’ liability insurance

Download PDF

ASIC v Healey & Ors [2011] FCA 717

There would be few directors of publicly listed companies who are not already familiar with the Centro decision, however, the implications of the case on their insurance cover should also be considered.


Briefly, ASIC launched civil penalty proceedings in the Federal Court of Australia against seven current and former directors and the former Chief Financial Officer of the Centro group.

ASIC sought declarations that the directors had breached their statutory duty of care and diligence owed to the Centro group in approving the consolidated financial accounts for the financial year ending 30 June 2007.

The consolidated financial statements incorrectly classified AU $2 billion in debt as non-current liabilities, when they were in fact current liabilities. They also failed to disclose US $1.75 billion in guarantees.

This occurred in circumstances where both Centro management and Centro’s external auditor, PricewaterhouseCoopers, had previously reviewed the financial statements and the directors’ report and had failed to identify these errors.

Justice Middleton found that each director had failed in his duties under the Corporations Act 2001 (Cth) (Corporations Act) by failing to properly analyse the group’s accounts.

The decision is a major victory for ASIC. The success of the Centro case and other recent high-profile decisions such as those involving James Hardie and Fortescue Metals may signal an increased interest in pursuing such prosecutions by the corporate regulator. Increased prosecutions will inevitably translate into increased claims on policies of directors' and officers' liability insurance (D&O insurance).

The Centro decision has significant ramifications for directors, particularly in relation to the operation, availability and cost of D&O insurance.

For more detailed information on this case, please see refer to our previous article ‘The Centro Eight’ dated 30 June 2011.

Raising the bar - implications for D&O insurance

Some insurers will view the Centro decision with concern.

Although the principles outlined in this case are not new, the decision clearly enunciates the standard which will be required of directors in considering and approving a company’s financial reports and providing the declaration required by section 295(4) of the Corporations Act (i.e. solvency, compliance with accounting standards etc).

The way insurers will respond to the decision is yet to be seen, but it is not unrealistic to expect changes to pre-conditions of cover.

The decision states that directors, whether executive or non-executive, will be required to have sufficient understanding of the company’s affairs and its financial statements, and be able to satisfy themselves of their accuracy.

While directors may delegate some aspects of their responsibilities, delegation will not completely absolve a director of his or her obligations. This issue is particularly relevant to directors who sit on a number of boards, and who must read and understand voluminous board papers and financial documents for a number of companies.

The Centro decision may lead insurers to evaluate the conditions that directors must satisfy before they grant D&O insurance. Insurers may create restrictions on the number of boards that each director can sit on or require warranties from board members, sitting on multiple boards, that they are able to obtain, digest and understand the large volume of material required to discharge their duties as directors.

The Centro decision could also have an impact on the skills required of board members by insurers.

It is possible that following the Centro decision, before extending cover, insurers will require boards to fulfil specific experience requirements or criteria, or contain a necessary cross-section of skills, such as accounting qualifications.

The questionnaires, completed by each director prior to being granted cover, are also likely to become more extensive and contain more detailed requests for information about the training and experience of directors, as well as their other directorial obligations.

Pricing implications

There is still capacity in the Australian market for D&O insurance and the Centro decision is unlikely to affect the general availability of D&O cover. However, the decision may have an impact on premiums.

For the larger insurers with international exposure, the decision will have minimal impact on price. These large international insurers have had exposure to this type of litigation and the ever expanding duties of directors in other jurisdictions and are likely to have factored this into their premiums.

The issue is whether the other smaller insurers with limited international exposure have factored this type of litigation into their pricing. In our view, while the smaller insurers will continue to write D&O insurance, premiums are likely to rise to reflect the insurer’s perception of increased risk and, in some cases, insurers will decide not to write cover for certain types of companies.

Class actions

The largest risk for insurers is the translation of increased ASIC prosecutions into shareholder class actions, driven by large litigation funders.

In recent years, legislative and common law developments, together with toughened corporate disclosure requirements, have provided fertile conditions for the growth of shareholder class actions.

Currently, there are more than 20 class actions underway in Australia. Many of these have been commenced on behalf of investors who purchased shares or other instruments in a company, where the company had either; published information, which was misleading or deceptive, failed to disclose price sensitive information to the market, or acted in breach of its duties and responsibilities under the Corporations Act.

To date, two class actions have been commenced against Centro, as a result of the matters that form the basis of this ASIC prosecution.

Class actions are extremely costly for D&O insurers and very disruptive to companies in terms of business and reputation. Rising numbers of class actions and the availability of commercial litigation funders is likely to increase pressure on the Australian D&O insurance market.

Summary - implications for D&O from the Centro decision

In short, brokers and directors should be aware that the Centro decision may have the following impacts on the operation, availability and cost of D&O insurance:

  • changes to pre-conditions of cover for example, restrictions on the number of board positions a director can hold
  • greater experience requirements or criteria for boards, particularly accounting qualifications
  • more extensive disclosure required of directors before cover will be granted
  • potential for increases to premiums
  • potential restrictions in cover in respect of some companies activities, and
  • potential reductions to sub-limits for defence costs, particularly legal representation expenses.

Directors and officers should seek appropriate legal advice to ensure their current insurance provides adequate cover in light of these recent developments. 



Focus covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. Focus is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.


Download PDF


For enquiries please contact: