Watching Brief
With Government stimulus packages and temporary insolvency relief due to be turned off over the coming months, the future of an increasing number of businesses will be under threat. And, with a dramatically changing regulatory environment, it’s vital brokers keep up to date
Trading can be challenging at the best of times, but COVID-19 has placed significant pressure on businesses across the world.
In Australia, the Federal Government introduced temporary insolvency relief in March to help companies continue to trade. These included increasing the minimum threshold of debt required for a creditor to issue a statutory demand from $2,000 to $20,000; increasing the time limit the company must respond within 21 days to six months and providing relief for directors from personal liability for trading while insolvent in terms of new debts incurred in the ordinary course of business.
Those provisions were due to expire in September, but have since been extended to 31 December 2020, and have reportedly saved over 2,000 businesses. And, with new proposed changes to insolvency laws announced by Josh Frydenberg, it is an ever-changing area.
“The immediate future may see an extremely dynamic and fluid regulatory landscape as Australia emerges in a post- COVID world,” says Peter Bowden, Partner at Gilbert + Tobin.
“It is important that brokers keep their fingers on the pulse on the regulation and development of the corporate insolvency industry, as constant evolution in regulation and the marketplace may pose a risk that brokers get left behind.”
The challenge that lies ahead
While the proposed legislation is designed to help more businesses stay in business, some will inevitably face incredibly challenging times.
“Businesses need to lay the groundwork now for what action they’ll take after those measures are gone,” says Bradd Morelli, National Managing Partner at insolvency and business restructure firm Jirsch Sutherland.
“With more challenging and uncertain times ahead, it’s never been more important for directors to understand how Australia’s insolvency procedures work so they can prepare their company.”
There’s huge variation in the levels of impact COVID-19 has had on businesses around the world. For some, particularly those in retail or hospitality, it’s been devastating. For others, including professional services, it’s been business-as-almost-usual.
“We’ve seen some decreases in turnover which result in a decrease in premium,” says Christian Garing, Managing Director of FTA Insurance, “but it hasn’t been as widespread or as material as we thought it might be. Some insureds have gone up in turnover – accountants and labour-hire companies, for example.”
There are, of course, businesses that are already deeply affected by the impact of COVID-19 – and the time bomb is ticking
With more challenging and uncertain times ahead, it’s never been more important for directors to understand how Australia’s insolvency procedures work so they can prepare their company.”- Bradd Morelli, Jirsch Sutherland
Graham Stevens, Director of Edgewise Insurance Brokers in Melbourne, says, “We have several clients in a situation where their six-month premium moratorium has come to an end, and they can’t pay their 12-month premium.
“As brokers, all we can do – and what we will continue to do – is do whatever is necessary to assist them to have the covers to allow them to continue to operate.”
Garling says that while, during COVID, financial lines and professional indemnity books haven’t been affected too much, it’s a different story with directors and officers and management liability policies – and this could spell trouble further down the track.
“It’s something that people are going to have to be a lot more aware of,” he says. “Particularly as a lot of D&O and management liability have insolvency exclusions.
“If a claim results due to insolvency it may not be covered by the D&O or management liability policy, which exposes the directors’ personal assets.”
Case study: Holding on by their fingernails
Graham Stevens, Director of Edgewise Insurance Brokers, Melbourne, shares a story of a client that couldn’t keep its insurance going after its six-month premium moratorium expired.
“One of our clients owns and has operated a very successful upmarket restaurant in the CBD of Melbourne and, in March, decided to take the six months’ premium moratorium on offer. He thought it would buy time to get through the lockdown with some breathing space at the end to rebuild the business and meet the premium payments.
“The moratorium period has now come and gone for him. He could not pay the premium and, following our notification to the underwriter, the insurance was cancelled. I in no way blame the underwriter for this – they were not in a position to do anything further.
“The lead-up to our clients’ current situation was that little over two years ago he took over the upper floor in addition to the existing ground floor lease and did a $4m renovation.
“Once the restaurant was open, it went from strength to strength — enter COVID-19. Trade completely stopped. After a while, he started to offer delivery of partially cooked meals, which was OK but was not paying the bills.
“About two weeks before the moratorium was to expire, we had a video meeting with our client to discuss his options. He advised that he had explored every scenario, simply could not find the $40,000 premium, and the most likely was Voluntary Administration.
“This would have meant that he would lose his home, all his assets, and as often happens, his family. Being in his late 50s, this would have finished him and left him penniless.
“Following the underwriter’s cancellation, we had no alternative but to place cover elsewhere to ensure our client had the covers required under his Lease and Loan Agreement to continue to trade, and at least give him a chance to come out the other end. If we had not taken this action, it was only a matter of time until he was asked for proof of insurance for his loan and lease agreements.
“He became genuinely emotional and so grateful that we could remove, if only temporarily, an issue that weighed heavily on his mind.
“It is during these times that we have to stand behind our clients and show them what brokers do best – look after our clients.”
Helping clients plan for the future
For those clients who are focusing on getting through the next month if not the next week, there’s a significant role for brokers to play in helping them understand the impending shifts that will happen, too.
“The most important factor from a broker’s perspective is to understand the industry and economic conditions in which the insured business is operating,” says Bowden.
“It is difficult to predict how a business may fare in the long term, but a keen awareness of industry trends, market conditions and potential risk factors is essential to adequately and effectively allocate risk.
“Brokers should, for example, review and seek advice regarding the types of insurance that fall within the definition of financial products in the Corporations Act and the current wording of their policies to consider the terms surrounding insolvency exclusions, and whether they are restricted from relying on ipso facto clauses in certain types of policies.”
Bowden also advises brokers to prepare for an increase in claims once the temporary insolvency relief measures expire at the end of the year.
“Brokers should also proactively review their claims management procedures and policies to ascertain the extent of possible future liabilities and limitation periods,” he says.
One thing’s for certain – this is a topic that’s going to dominate conversations with clients for months and months.
Insolvency exclusion clauses in insurance policies
Peter Bowden, Partner at Gilbert + Tobin, explains why the wording of insolvency exclusion clauses in insurance policies and the timing of insolvency announcements are critically important.
“One of the most significant interactions between insurance and insolvency is in the application of directors’ and officers’ liability insurance (D&O).
“Ordinarily, D&O covers directors and officers for defence costs, damages, compensation and costs awarded against a director as well as interest up to the agreed monetary limit on the cover.
“Of particular relevance in this regard is the scope and effect of any insolvency exclusion clause in a D&O insurance policy.
“Insolvency exclusion clauses typically exclude liability for insurers where the loss in question arises out of the insolvency of the director’s company. However, Courts have been cautious not to construe insolvency exclusion clauses in a manner that would be contrary to the commercial purpose of D&O insurance and the objectives of parties entering into these policies.
“On this basis, the precise wording and timing of the company’s insolvency are of critical importance.
“An exclusion clause will not necessarily have effect simply because a company goes into insolvency, and (depending on the wording of the policy), Courts charged with interpreting a policy may only give effect to exclusions if there is a direct causal connection between the claim made against the directors and the company’s insolvency”