Bluebook‘s “Back to Basics” series – Claims-made policies & notification
Professional indemnity, Directors & Officers Liability, Employment Practices Liability, Management Liability, Cyber and Statutory liability, are classes of professional risk insurance which are written on a “claims made” or “claims made and notified” basis.
This means that cover is triggered when a claim is made against your business during the policy period regardless of when negligent conduct that gave rise to the claim occurred – subject to any retroactive date noted on the policy.
Therefore, it is critical that your business notifies its insurer of any claim or known circumstance which may lead to a claim within the current period of insurance (or any extending reporting period if provided for under the policy terms).
If your business fails to properly notify the insurer, it risks a subsequent claim not attaching to the relevant policy and falling outside of cover or voiding a future policy for non-disclosure. Once claims-made policy has expired, if not renewed, generally no further claim can be made under that policy – for any claim that has not already been reported to the current insurer (the remedial powers of Section 54 of the Insurance Contracts Act 1984 (Cth) (ICA) notwithstanding).
A claim by any other name…
A claim is the receipt by the insured from a third party of a written demand for compensation (e.g. a letter of demand from a client or solicitor seeking compensation and foreshadowing potential litigation) or a statement of claim (or other originating process) filed in the courts.
A claim is “made” on the date that the insured receives a third party’s assertion of liability against it. A claim made before the policy inception date or after the policy expiration date is not covered. However, a policy may also respond to a claim made after the policy has expired, provided the claim arises from facts or circumstances notified to the insurer during the term of the policy.
What is a notifiable “circumstance”?
Some events fall short of a claim and then the question becomes whether the event might be a notifiable “circumstance that may give rise to a claim” which also needs to be notified to your insurer.
The legal test whether notice is required is whether a reasonable person in the insured’s position would consider there was a reasonable possibility of a claim arising.
Therefore, if you reasonably believe an event is likely to materialise into a claim in the future, you should notify your insurance broker, (for notification to your insurer) immediately rather than waiting for a claim to be received. This will preserve your right to claim under the current policy at a later stage, even if you decide to change insurers.
In practice, businesses should carry out regular internal inquiries and definitely prior to policy renewal, of any claims or potentially notifiable circumstances. Examples of notifiable circumstances include:
- A customer or third-party complaint foreshadowing a lodgement of a complaint about the business’ conduct to a professional body.
- Treatment which has resulted in injury and the customer’s inquiry into your insurances held.
- Realisation (perhaps by way of internal compliance reviews) within the business that advice or services have been negligently provided and that may result in a claim arising as a result.
- Internal concerns raised by employees about systemic malpractice or the competency or adequacy of advice or services provided to clients.
Claims-made policy terms vary however notification conditions usually require:
- There must be a circumstance;
- Of which the insured is aware;
- That is “likely to” or “may” give rise to a claim;
- That the insured has notified in accordance with the requirements of the policy.
Where the policy terms are silent on notification requirements, notification should be provided as per section 40(3) of the ICA that is providing written notification to the insurer of facts that might give rise to a claim “as soon as reasonably practicable after the insured became aware of those facts but before the insurance cover provided by the contract expired”.
If in doubt it is best to notify early and notify often. As your insurance broker, we are happy to provide further guidance on notification and to ensure that the right information is relayed to your insurer in the right form to protect your entitlement to cover under the policy terms.
 FAI General Insurance Co Limited v McSweeney (1999) 10 ANZ Ins Cas 61-443. 75,033.
Regulations and Statutory Liability Policies
Australia is considered one of the most regulated jurisdictions in the world to be a director or officer and the environment is getting more onerous with the regulators now placing more emphasis on protecting the end consumer. With increased powers, the regulators are going to great lengths to make an example of entities publicly that are unknowingly in noncompliance with various regulations. What are directors and officers to do?
Now more than ever, companies and their risk managers need to keep abreast of regulatory changes to avoid getting caught up in the regulatory rabbit hole. Not being aware is no longer an excuse otherwise enforcement action may follow.
There is a vast array of regulations that apply to entities – some of the more common ones that most organizations are usually aware of are the Competition and Consumer Act 2001 and Workplace Health and Safety Act 2011. Other important regulations impacting organisations are:
- Corporations Act 2001 (Federal)
- Privacy Act 1988 (Federal)
- Environmental Legislation (State based)
- Product Safety Legislation (State based)
- Industry specific Legislations
There are several changes in regulations that have transpired over the course of 2020 including the change in NSW EPA Prosecution Guidelines, amendment to Work Health and Safety Act 2011 (NSW) and amendment to Workplace Safety Legislation (VIC).
While the environment was changing rapidly post the Financial Royal Commission, COVID has accelerated this pace of change even more.
As an example, the NSW EPA Prosecution guidelines were last revised in 2013. The August 2020 update introduces additional factors to the list of considerations when determining whether to prosecute.
Another major amendment which came into force on 10 June 2020 is to the Work Health and Safety Act 2011 (NSW) where there is now a prohibition of insurance of WHS fines and monetary penalties. A Statutory Liability policy will still be able to afford cover to defence costs, investigation costs, prosecution costs and costs of compliance in relation to enforceable undertakings. But fines and penalties in NSW are now uninsurable.
The Workplace Safety Legislation Amendment (Workplace and Other Matters_ Act 2019) (VIC) came into force on 1 July 2020. The amendment introduces workplace manslaughter as a new offence granting additional powers to the regulator under the Act in bringing action against the organizations and individuals for breach of Occupational Health & Safety Act 2004 (VIC) where there has been a workplace fatality. The amendment shows the far-reaching consequences for organisations and individuals. The penalty under the Act is up to $16.5 million dollars and company directors and officers can face jail time of up to 20 years!
Regardless of the industry type and size of business, Statutory Liability insurance plays an increasingly important role to assist risk managers navigate their way through the regulatory environment and provide protection to their company and balance sheet.
To discuss how Bluebook can assist you in providing Statutory Liability insurance solutions contact us.
Law reform – Unfair Contract Terms extend to insurance contracts next year
From 5 April 2021, the Insurance Contracts Act will be subject to Unfair Contract Terms regime. What this means and how it may affect small business insurance arrangements are reviewed in this article.
The Unfair Contract Terms regime
A decade ago the Government introduced unfair contract terms laws (the UCT regime) to bolster consumer protection from unfair terms in standard form consumer contracts – i.e. those contracts which consumers have little (or no) power to negotiate variation to the terms.
The UCT regime applies to consumer and small business standard form contracts for financial products and services but not to insurance contracts, which are governed by the Insurance Contracts Act (ICA).
UCT and the ICA
The ICA was introduced more than three decades ago to modernise the law relating to insurance contracts so that a “fair balance” could be struck between insurers, insureds and the public.
The ICA contains consumer protections most notably the obligations on insurers to carry out pre-contractual disclosure to insureds about the terms of the policy before the contract is entered into and the central duty of utmost good faith which prevents the parties from relying upon terms in the insurance contract if to do so would be inconsistent with that duty.
However, in recent years such protections have been considered insufficient because of the power imbalance between insurers and insureds. The final straw was last year’s comment by Commissioner Hayne in his final report for the Financial Services Royal Commission, where he recommended that the UCT regime should extend to insurance contracts.
There has been discussion since about how the UCT regime should apply to insurance contracts and how to ensure consumers and small businesses have the same protection from unfair terms in insurance contracts as they do for other contracts for financial products and services.
From 5 April 2021, the ICA will be subject to UCT regime.  Any insurance policies entered, renewed or reviewed after that date, and which meet the legislative criteria, will be caught within this regime.
Which insurance contracts will the UCT regime apply to?
For the UCT regime to apply an insurance contract, it must meet three threshold criteria:
1. The insured affected by the unfair term is a consumer (an individual) or a “small business”.
2. In the case of a small business insured, the premium payable must be under a certain threshold.
3. The insurance contract is a standard form contract.
A small business is one that employs fewer than 20 people and either the ‘upfront price payable’ (that is the premium) under the insurance contract does not exceed $300,000 or for a policy period of 12 months or longer, where the premium does not exceed $1,000,000.
An insurance contract will be considered a “standard form contract”, unless proven otherwise. This will be the case even if a broker acts as an intermediary in placing the policy, provided there is no room to negotiate the terms underlying the insurance contract.
The UCT regime could potentially impact on speciality lines of insurance for SMEs – particularly given the ability to negotiate cover in this hard market. Management liability and employment practices liability insurance sold to small businesses without further negotiation of the terms, or professional indemnity insurance sold to members of professional bodies, may be captured by the new regime.
What terms are excluded from the UCT regime?
1. Any term that defines the main subject matter of the contract (that is the description of what is being insured – e.g. a business premises, a house, a car, a person).
2. A term that sets out the excess or deductible so long as they are set out transparently.
What might constitute an unfair term in an insurance contract?
The three elements to the test of whether an insurance contract term is “unfair”, are:
1. If the term causes a “significant imbalance” in the parties’ rights and obligations.
2. If the term is not “reasonably necessary” to protect [an insurer’s] “legitimate interests”.
3. If the term would cause “detriment” to [the insured] if it were relied on.
The legislation also provides some examples of unfair terms including:
1. A term that allows the insurer to elect to settle the claim with a cash payment calculated according to the cost of repair or replacement to the insurer, rather than the actual cost to the insured.
2. A term that requires the insured to pay an excess before the insurer pays the claim.
Under the ICA, an insurer can simply rely on the policy terms providing it has made adequate disclosure to the insured and its reliance on the terms is not inconsistent with its duty of utmost good faith. However, under the new regime, small business insureds (and interestingly any third party beneficiaries to their insurance) may challenge a policy term as unfair, i.e. an exclusion which precludes cover, and the insurer will now need to justify that exclusion as reasonably necessary to protect their legitimate interests.
What does this mean for you?
The UCT regime may offer another avenue for small business insureds (and third-party beneficiaries) to revisit indemnity decisions based on an “unfair” term provided the policy is a standard form contract. As a result, insurers are now in the process of reviewing their products lines and, no doubt, the basis upon which limitations on cover can be justified, ahead of next year’s reforms.
 See the Australian Consumer Law (Schedule 2 of the Competition and Consumer Act 2010) and Sections 12BF-12BM of the Australian Securities and Investment Commission Act 2001
 Sections 12-15 of the ICA.
 Treasury Laws Amendment (Unfair Terms in Insurance Contracts) Bill 2019.
 Financial Sector Reform (Hayne Royal Commission Response – Protecting Consumers (2019 Measures)) Act 2020 (Cth), which received Royal Assent on 17 February 2020.
 Section 12BH of Australian Securities and Investment Commission Act 2001.
Chapter Two – Bluebook partners with Network Steadfast
It is an exciting time for Bluebook as we enter Chapter Two in our growth as a leading insurance brokerage for the mid-market corporate risks sector.
Bluebook has decided to strategically align forces from August 2020 with Network Steadfast, to leverage our core values and expertise against Network Steadfast’s scale, systems and efficiency and their broad access to a diverse range of businesses across the Australasian market.
We will continue to operate as we have always done, with our clients’ needs first and forefront. However, with this partnership we will have ever greater reach to service our clients and increased clout in negotiating the best placements and protection on your behalf.
“We are delighted to partner with the team at Network as our way of thinking is aligned – clients are our focus. Their tailored service approach, negotiating power and global reach reflect some of the many benefits that this arrangement will bring to our existing and ever growing customer base” – Bluebook’s CEO, Peter Apolakiatis
Network Steadfast is a fast growing business, now having representation across four states with seven locations, and over $220M in GWP placed annually. They are also backed by Steadfast Group (ASX:SDF) which Bluebook is already a member of. Their CEO Andrew Broughton had this to say about the partnership:
“It’s an absolute pleasure to partner with Bluebook in Queensland as part of our national growth strategy. The skills that Bluebook staff bring to our organisation will align perfectly with our existing capability and reach. My relationship with Peter has developed over a fifteen year period and I’m excited to have partnered with a principal who has a long term strategic mindset which is built upon the strict prioritisation of client needs.”
For more information on the benefits this will bring feel free to reach out to your Bluebook Account Director or representative and they will be happy to discuss.
Where time is of the essence in securing a lucrative business deal you may not have time to sift through the terms of the contract presented to you for signature. However, it can be critical if something goes awry to know how, and to what extent, your business is exposed, whether it can financially bear that exposure and whether your insurer will cover this exposure on your business’ behalf.
Most commercial contracts – whether they be building development contracts, leasing agreements, labour hire agreements, subcontractor agreements or purchase orders – include indemnity and insurance clauses which are designed to transfer and / or allocate risk for liability and loss.
The devil is in the contract’s detail as to whether the parties agree to share the burden of the commercial risks equally or whether one party assumes all or the lions’ share of the responsibility for those risks.
Drafting indemnity and / or hold harmless clauses is an important part of contractual negotiation as it can radically alter the exposure of the parties at common law or under legislation. The most common types of indemnities encountered in commercial contracts include:
• Proportionate indemnities – where Party A agrees to indemnify Party B, that is cover Party B’s losses, but reduced proportionately to the extent that Party B’s acts and omissions caused or contributed to the loss.
• Bare indemnities – where Party A agrees to indemnify Party B against all losses but is silent as to when and in what circumstances the indemnity will be triggered.
• Reverse / reflexive indemnities – where Party A agrees to indemnify Party B against losses including those caused or contributed to by Party B’s own acts and omissions (mostly Party B’s own negligence).
Proportionate indemnities do not increase the parties’ liability above and beyond what would be required of them at general law and are usually considered to be neutral in effect.
Bare and reverse / reflexive indemnities transfer risk above and beyond one party’s liability exposure at general law. These types of clauses are often inserted into commercial contracts by principals, lessors or other parties with the greater bargaining power in the relationship in order to shift liability to downstream contractors.
Bare indemnities are silent as to whether they indemnify losses arising out of Party B’s own acts and omissions and / or failure to properly perform the contract. This ambiguity can be problematic because a court may interpret the clause broadly and as a result impose obligations that were not contemplated by Party A during the contractual negotiation process.
Reverse / reflexive indemnities should be carefully considered. The indemnifier might not have the financial capacity to fund the loss and liability assumed under such an indemnity and it may not align with the scope of cover provided by the indemnifier’s insurance.
Indemnity clauses should be underpinned by appropriate insurance cover to ensure that the indemnity can be met. To avoid being left with an uninsured exposure, it is critical the draft terms are brought to your broker’s immediate attention. This way any potential gaps can be identified at the outset and your broker can negotiate further with your insurer to obtain appropriate coverage.
Insurance clauses detail the parties’ obligations with respect to obtaining insurance for the term of the contractual relationship.
Problems arise when one party requires that the other to effect insurance which covers their liability for loss and damage, but the clause itself is not precise in its language. For example, requiring one party to “note” another party’s interests on an insurance policy is not the same as requiring another party to include that party as a “named” insured.
It is also important to consider whether the indemnity and insurance clauses invalidate your insurance by triggering an exclusion in the policy terms. The most common example is where Party A agrees to indemnify losses arising out of Party B’s negligence, but Party A’s liability insurance does not respond because of a contractually assumed liability exclusion.
Finally, if an obligation to insure has not been met, this can lead to a potential breach of contract claim which can have significant consequences for your business.
Again, the importance of providing the draft terms of any commercial contract to your broker before signature cannot be overstated. Your broker is in the best position to determine whether your business has complied with its insurance obligations with respect to a principal or other third parties and negotiate with the insurer on your business’ behalf to have those parties included, if required.
We want to provide you with some information on Bluebook’s strategy during the current and evolving situation relating to COVID-19.
Bluebook Insurance Brokers has not had any confirmed or suspected cases of COVID-19 in our building, our office or with our staff. With that being said, we have already taken precautionary measures in our office building including:
– Implementing secure and remote working solutions for our staff.
– Postponing/cancelling or rescheduling any business meetings and travel.
– Asking any team members displaying cold and flu-like symptoms to stay home and self-isolate.
In conjunction with our insurer partners who have also implemented similar remote working arrangements, we are confident that these measures will allow Bluebook to provide continuing service to your business and its insurance needs. It is “business as usual” here and you shouldn’t notice any change in our services. Should you have any queries you can still speak with our staff using our usual contact methods of email and phone.
Bluebook will stay up to date with any changes and recommendations from the WHO and Australian Government about best practices for minimising the community transmission of COVID-19 and implement those recommendations where necessary.
We hope that you and your loved ones are staying safe during this time and should you need any further information relating to this issue, please do not hesitate to contact us.
By Account Director Angela Rowe
I was among nine brokers invited to attend the NextGen Leadership Academy in Zurich, Switzerland.
Zurich’s 1872 NextGen program targets emerging leaders in the Australian & New Zealand broking market and aims to equip brokers like myself with the necessary skills to achieve future excellence in our evolving industry and develop skills in an international context.
The trip to Zurich signalled the start of this incredible program, providing us the opportunity to develop our leadership skills, build our network and reflect on market dynamics.
The course was held in Zurich’s purpose-built Development Centre over three days; the centre offering breathtaking views across the Zurich Lake and of the snow-capped mountains.
I arrived in Zurich and met my fellow NextGen leaders where a bond was quickly formed over a few ales and red wines by the fire. We shared many memorable experiences during our time in Zurich.
We were fortunate to meet unbelievably inspiring and talented Zurich Executives from their Global Management Team, who spent time with us sharing their personal stories and insight into the work they do for Zurich. We met:
• Sierra Signorelli, Chief Underwriting Officer Commercial Insurance
• Michelle Auer, Group Head HR Business Partner Commercial Insurance
• Kate Hughes, Group Head of Employee Experience, Diversity and Wellbeing
• Mark Heasman, Senior Program Manager Z Zurich Foundation
• Gregory Renand, Group Head of Strategic Partnerships and Integrated Campaigns
• Theo Pitsakis, Head of SME Australia
• Przemyslaw Rymaszewski, Head Point of Underwriting Analytics
• Fausto Steidle and Jean-Pierre Krause, Head of Risk Engineering Operations
• Dr. Paul Wöhrmann, Head of Captive Services for Europe, Middle East & Asia Pacific
• Joshua Nyaberi, Head of Captive Fronting for Continental Europe
• Reto Heini, Regional Distribution Manager Germany & Switzerland
• Luca Ravazzolo, Global Financial Lines Head
• Alison Martin, CEO Europe & Middle East and Bank Distribution
• Michael Blattner, Head of International Programs Training & Certification
The incredible experience was both personally and professionally invaluable to me. My key takeaways include:
• Organisations must allow and embrace diversity of opinion and thought
• I must challenge my own assumptions
• Always learn, grow, and strive to do what I enjoy
• It is important consider what knowledge I want to learn from a mentor, and that they assist me with my development gap/s
• Be authentic and adaptable
I am grateful to Zurich for holding this incredible event, to Giles Crowley for his vision and execution of the Academy, and to Peter Apolakiatis and Bluebook for their support and encouragement. I look forward to what the rest of the 12 month program will bring, and to meeting my NextGen companions in the future and hearing about their leadership journeys.
Just a month into 2020 and we have another major class action launched against a large Financial Institution. It is looking like 2020 will be a repeat of 2019 and 2018.
Following the Financial Services Royal Commission, the scale and ferocity of the class action environment has accelerated! It is no longer just restricted to ASX listed companies whose share prices have taken a hit. The last couple of years has seen the $2.6 trillion dollar Australian superannuation sector in the spotlight.
In 2019, AMP and the trustees of its superannuation funds were alleged to have overcharged fees to more than one million members and failed to fulfill their legal duties to their customers. The administration and other fees that were charged were too high – essentially they were paying themselves handsome fees from their members’ funds! AMP set up subsidiaries to outsource certain activities which they then used as an opportunity to gouge more fees. They even charged fees for no services. How much were these fees? Fees started at 2.36% for ‘administration’ and another 0.69% called an investment fee. Over 3% in fees before a dollar in earnings in a low interest rate environment – robbery!
In January 2020 it was reported that there are allegations that National Australia Bank charged 330,000 customers excessive fees and commissions on superannuation products years after they was meant to cease. Lawyer Maurice Blackburn acting on behalf of the superannuation members claims that two of NAB’s super trustees breached their duties and failed to act in the best interests of their customers. Specifically, it is argued that NAB subsidiaries MLC and Nulis failed to transition 330,000 members’ super into the lower cost government mandated option in an efficient time frame and in the process caused substantial losses to members. It is believed the bank ‘earned’ hundreds of millions of dollars from these excess fees. The scale of this blunder is mind-boggling. It’s difficult to believe that the senior executives at the time were not aware of this and if they truly were not, they were undeniably asleep at the wheel.
Could it be that these examples are just another iteration of the poor corporate culture in Australian Financial Institutions that has persisted for decades? Or is it that companies seek ever more extravagant ways to reach revenue budgets? It is probably both. But in the end was it worth it? When all the class actions have been completed and all the fines handed out, it is certain that our large Financial Institutions would have been better placed following the rule book instead.
The real winners out of these class actions are not the regulators, the real winners are the customers as they now have active regulators on their side.
As we celebrate our first year in business, the team has been reflecting on a year of significant growth and achievement both professionally and personally. We look back to 18 months ago when we were developing the Bluebook brand and culture, to where we are now, and are immensely appreciative of the strong relationships we continue to develop with our clients, suppliers and network, as well as within our own team.
When we started Bluebook, we had a vision for a business that was transparent, added real value for our clients, put our clients at the heart of everything we did, and was relationship based. We had high expectations on ourselves and we didn’t know if we could execute everything we aspired to. But on reflection, we’ve achieved so much more, and are very proud of where we are today.
Starting a new business is always a huge learning experience but it has taught us to have self-belief and to trust the process and your values. It has cemented what we have always known; that the key to any successful business is having an incredible, client-focused team, as well as clients and suppliers who align with your values.
Our significant client growth has come from nurturing our existing clients but also new clients that appreciate our energy as well as the value and transparency they can be assured of through our partnership. We think our energy is infectious. No matter who our client is, we take the time to understand their business—their staff, clients, ambitions. Reading them like a book so to speak. Knowing their story. That’s how we can add genuine value and insight to their business.
As to the next twelve months, Bluebook is in a unique position of being agile enough to support businesses where needed, and sectors not previously considered. One of those is the retail and textile sector which continues to have a tough time globally and needs more support – not just from the insurance industry through adequate covers, but in all parts of their business operationally. Having just worked with a major retail group where we saved them $100,000 in annual premiums, we are confident of the value we can add and the positive flow on effect of those savings.
Our focus will of course continue on our current clients and sectors, and we are pleased to be adding an in-house legal service next year to expand the services we can offer them. Always striving to be better – through better insights and more innovative services, will remain at the heart of what we do.
To our amazing clients, suppliers, friends and broader network, thank you for being an integral part of Bluebook’s first chapter and contributing to the fantastic year it’s been.
“I’ve got travel insurance through my credit card. That’s enough.”
Travel insurance offered on a credit card is free for a reason. It only provides insurance for certain scenarios, and often at strict limits. On the other hand, Corporate Travel Insurance provides you with peace of mind to know that your insurance – and your broker – is there to help. Corporate Travel Insurance provides cover for a wide range of events including overseas medical costs, theft of your baggage domestically or internationally, international medical evacuation, lost booking fees and more.
To protect both your wallet and your state of mind, Corporate Travel insurance is well worth it.
“I’m only travelling in Australia and I have Medicare and private health insurance.”
A real benefit of Corporate Travel insurance is that it provides protection for quite a wide range of events, even for domestic travel. For instance, it provides cover for lost travel deposits due to unforeseen circumstances, and overbooked flights. If you take your laptop or work phone on the trip, they are insured against damage and theft. Perhaps the most widely used benefit we see is also the Rental Vehicle Excess benefit. If you hire a vehicle, take out the necessary vehicle insurances and then get into an accident, your corporate travel insurance will pay the excess, not you.
“It’s only a short trip, I won’t need travel insurance.”
Unfortunately, whether it is a short trip or a long trip, accidents do happen. Whether it’s a missed transport connection, a stolen smartphone or a rolled ankle at the airport, these events happen. Even the shortest of domestic interstate flights are frequently subjected to delays over 24 hours, overbooking, lost baggage and worse. It’s a gamble to rely on good luck alone when you travel, and in our experience Corporate Travel insurance offers excellent value.
The Financial Services Royal Commission has given fangs to the corporate regulators including ASIC. For years ASIC has been a corporate watchdog lacking in intensity. Any wins were met with more a wrap on the knuckles for company’s that got out of line. That meant the prevailing corporate culture amongst financial institutions persisted unchallenged.
That has swiftly changed following the Royal Commission. A complete restructure at ASIC has meant that they are now on the front foot in terms of enforcing their regulation.
One of the stand-outs from the Royal Commission was NAB receiving personal details and leads on potential mortgage clients from hairdressers and gym instructors in exchange for commissions.
Back In 2005 the US housing market was in the midst of its greatest ever real estate bubble. Valuations galloped higher and higher and the states of California, Nevada and Florida led the way. The bubble and subsequent bust which preceded the Global Financial Crisis even led to a blockbuster movie ‘The Big Short’. It was in this movie, where it was described in plain English, how radically things got out of control. At the peak of the housing bubble, a Miami stripper is portrayed in the movie as owning five houses and a condo—this being a symbol of the madness. The lending at the time was called ‘sub-prime’ where even the unemployed and fraudsters could get their dream home. Standards had gone out the window. This is the thing with bubbles – standards drop, fraud becomes prevalent, and the lenders use clever tactics to build their portfolios. The regulators are absent, asleep at the wheel.
And so in Australia the Royal Commission highlighted all the shady practices and poor corporate culture that has persisted unabated through our own housing bubble. It has revealed some of the horror stories the big banks used for ever increasing profits and market share.
Well now ASIC is fighting back. It has the wind at its back and is driving home the message of increased compliance and regulation. This has led to a more powerful structure at ASIC. The number of commissioners has gone from four to seven with a much more flexible decision-making structure and better engagement with the community. There is also a new layer of executive directors that report to the commissioners. The new strategy is now about enforcement. And the new expanded team is talking ‘prosecutions’. The call for accountability from the general public means they want to see jail time for executives’ wrongdoing.
How high do they go? Don’t be surprised if they go after the top – the big players, the big public names. That might mean the Chairmen and CEOs of the Big Banks!
The Commonwealth Bank of Australia was the first ‘major’ to report for the 2019 reporting season. Amongst the reasons cited for the fall in profits for the 2018-19 financial year was the increased compliance requirements following the Financial Services Royal Commission. An increase of 600 personnel in its risk and compliance division and $900M spent on risk and compliance systems put a huge dent in operating income.
With the spotlight falling on the lack of corporate culture at Australia’s largest financial institutions, directors have had to focus additional resources on compliance, risk management and ASX continuous disclosure obligations.
It is not just the big financial institutions being impacted. Increasing disclosure requirements and higher compliance costs have been a trend since the GFC when trust of large corporations collapsed following a near collapse of the entire financial system. Compliance is now a budgeted expense for all enterprises large and small. Whether in-house or out-sourced, resources need to be dedicated to compliance to ensure a business runs smoothly. If you are not being compliant then it could result in a business underperforming its peers.
Continuous disclosure requirements mandate listed companies to disclose information which may affect its share price. Continuous disclosure tries to ensure that all investors have all available information at all times and that nobody has ‘inside information’. Directors are responsible for meeting these continuous disclosure requirements and failure for a company to do so can mean directors are personally liable.
What exactly is required to be disclosed?
The language around disclosure requirements is anything that could affect a companies’ market price or value should be disclosed. This is subjective but usually includes earnings announcements, announcements on new acquisitions or contracts, anything that requires board approval and information that could be regarded as sensitive. It can also include a change to a rating by a rating agency, changing auditors, a proposed change in direction by a business or a change in control of the responsible entity. A company is better to err on the side of caution when disclosing.
To ensure companies keep up to date with compliance requirements and continuous disclosure requirements certain policies and procedures need to be put in place. Many companies have mandatory compliance requirements as stipulated in the Corporations Act and these need to be documented in a companies’ Risk and Compliance Manual or similar document. All ASX listed companies are required to have a policy in place for complying with its continuous disclosure requirements. The relevant guidelines are in the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations.
Following the Financial Services Royal Commission, the requirements for compliance and continuous disclosure obligations have just ratcheted up a notch. Employing more resources to these areas gives a company a better chance of thriving in the current economic landscape.
- Culture – who does it the best and why?
Melbourne Storm has the best culture.
It starts at the top. Craig Bellamy’s work ethic is unbelievable, it helps to have ‘once in a generation’ players with the same work ethic. You either toe the line or find another club.
- State of the game – how can we improve it?
It’s like a cat chasing its tail, you have the coaches planning every week on how to bend the rules. You’ve got two referees working their butt off when 26 players are pulling against them.
- What advice would you give to an up and coming leader playing the game?
Well you’re a leader because everybody follows you. Make sure they follow you for the right reasons. Respect the past, present and future of our game. But most of all enjoy the journey.
- Does loyalty have a Price?
Loyalty, absolutely it has a price. Allan Langer, Darren Lockyer, Andrew Johns, could have went to any other club for more money.
But for the short-term financial loss, you will make it up in the long run with your legacy.
- Does the game / club help players enough with life after football?
You can lead a horse to water you can’t make a drink. Players have to want to go out there, mix with the public, pen sponsors and find out what the real world’s like. There are so many different education programs now in the NRL. There’s no better education then surrounding yourself with real people.
What the cladding crisis means for insurance
What happens when there is no insurance left? The property industry is quickly finding out. The fallout from the cladding crisis means many building surveyors and other professionals connected to the construction industry are unable to obtain Professional Indemnity insurance. Insurers have said they are not providing cover at any price!
This is what happens when there is a “hard market” in insurance. Insurance capacity contracts, premiums increase, deductibles increase, there are restrictions in coverage and there are less insurance markets willing to provide coverage. And sometimes the insurance market declines to provide coverage at all. The last major hard market in Australia was when HIH collapsed in 2001. Back then premiums doubled and tripled overnight. The centre of this current hard market in 2019 is the construction industry and more broadly the property industry in Australia.
In Australia, building regulation is governed by individual states and territories. Victoria started auditing high-rise buildings for the presence of combustible cladding back in 2014. The cladding crisis escalated after the Grenfell disaster in London in 2017. The other states followed to put in place ongoing auditing procedures and processes.
Building surveyors are responsible for signing off on buildings. These include building permits and occupancy permits. If they cannot do that then building projects will simply come to a halt. They need professional indemnity insurance. Now some of them cannot get it. The Master Builders Association (MBA) said up to 30 per cent of building surveyors were required to renew their insurance by the end of June. There is anecdotal evidence that many did not have their policies renewed this year!
The Global Financial Crisis (GFC) of 2007-2008 was the most serious financial crisis since the Great Depression of the 1930s. What started as a crisis in the sub-prime mortgage market became an international banking crisis that led to the collapse of some major financial institutions. At one point in the crisis, many leading financial luminaries posited that the crisis would bring down the whole financial system. What happens when a global financial system collapses?
At various times in the history of financial markets, the “lender of last resort” has had to step in to save the day. On 15 September 2008 the major investment bank Lehman Brothers went bankrupt after the United States Federal Reserve failed to guarantee its loans. The next day, in order to prevent the global financial system collapsing, the Federal Reserve took over American International Group. The lender of last resort saved the day.
The current cladding crisis in Australia has been described as a disaster for the building industry. Parts of the industry could come to a standstill. The Victorian Government has now stepped in as “insurer of last resort”. They are setting up a dedicated authority, Cladding Safety Victoria to deal with the crisis and they have announced a $600m package to fund flammable cladding removal from buildings in the state.
As the insurance crisis deepens the need for further “insurers of last resort” may be necessary.
Guest article: Future proofing your business through innovation
By Heath Shonhan, Partner, Bentleys QLD
In recent years there have been several Royal Commissions undertaken in Australia. Investigation has been made across a range of issues and industries including child sexual abuse, banking and finance, home insulation and trade unions. Now in 2019, the spotlight will shine on the nation’s aged care providers in the biggest probe the sector has ever faced.
The impacts of the Royal Commission into Aged Care Quality and Safety are significant – particularly in terms of reputation for providers in the sector and business performance of aged care facilities.
How will a focus on innovation help?
Innovation activities help across a broad range – from better exploiting and improving successful and established business models, through to creating and exploring new horizons in new and potentially disruptive business models.
The exploit side of the spectrum largely focuses on innovation activities to create efficiencies or incremental changes. Most aged care providers do this relatively well via their continuous improvement plans. Examples include business process re-engineering or the replacement of products and services with newer, better ones. Unfortunately, focusing on this alone is not sufficient.
The explore side of the Innovation spectrum focuses on completely new value propositions, business models, and other types of growth engines. This is where innovation activities happen which can result in significant new growth. Established companies rarely master these types of innovation activities, because they require a very different way of working. The culture, skills, processes, and even incentive systems that work well for efficiency and sustaining innovation simply don’t produce more radical innovations that result in fresh growth.
Are new tools required?
With increasing numbers of industries and sectors recognising and embracing the power of innovative thinking, the business tools that support these approaches keep getting better – and they can very easily and successfully be integrated into the future thinking for any aged care provider. We have already identified that a business’s continuous improvement plan provides a great starting point for ‘exploiting’ activities. ‘Exploration’ activities require a very different set of business tools. The Business Model Canvas and Customer Value Proposition are tools and processes that we regularly rely on. They provide the frameworks and guidance to identify new growth opportunities and help you to construct the roadmap to get there.
Aged care providers who want to grow and strengthen in the future need to innovate across the entire spectrum from “exploit” to “explore”. Various strategists call this the ambidextrous organization. Simultaneous success on both levels can be challenging. Each approach needs to be supported by different organizational structures, processes, timeframe expectations, risks and tools. The culture, skills, processes, and staff incentive frameworks that exploit and drive efficiency in an organisation are often vastly different to the elements required to nurture explorative innovation. But it is possible to do both. When you think innovatively – everything is possible.
Have you seen examples of where these types of approaches have helped strengthen an aged care organisation?
Yes – we are working with some great forwarding thinking aged care providers who are working across three different innovation objectives:
1. Increasing the efficiency of their established business: for example, by improving business processes and careworker productivity with collaborative technologies;
2. Sustaining the established business: by introducing new products and services that replace old ones and by implementing marketing and advertising innovations; and (our personal favourite)
3. Creating new growth engines: by experimenting with entirely new value propositions or business models.
Should everybody in an aged care organisation be an innovator?
Yes – but in different ways. Some people in the company should focus on efficiency and sustaining innovation, while others in the company should focus on innovation that leads to new growth engines. Each type of innovation activity requires specific ways of working, skills, and tools. Hence, providers need to train and equip people with different innovation goals in different ways. Aged care providers also need to allocate resources strategically across those different innovation activities on the exploit-explore spectrum.
Is your organisation serious about new growth engines?
There are a number of ways to look at how seriously aged care providers take different types of innovation. The most obvious way is to look at resource allocation – time, money, and people. What we usually see is most resources being dedicated to efficiency and sustaining innovation. Very rarely (prior to involving us in their strategic planning!) do we see aged care providers investing in new value propositions, business model innovation, or management innovation. Successful technology and science innovations alone don’t automatically lead to growth. The combination of the right value propositions and business models with the new technologies is what creates substantial growth.
What is Bentleys doing to support innovation?
Bentleys has been working with aged care startups, entrepreneurs and intrapreneurs through their newly developed program Carefactor – Australia’s first aged care incubator program. CareFactor is an accelerated program of growth and learning with access to mentors, community and networks in aged care, technology, marketing, investors and capital raising. Find out more at https://www.bentleys.com.au/carefactor
About Heath Shonhan:
Heath is a Partner at Bentleys Qld, responsible for advising high growth clients, private family enterprise, multinational corporations, government, banks, churches and healthcare institutions. Through this role Heath advises several Boards of Multi-Billion dollar organisations, Chairs a number of Advisory Councils and Family Councils, and works with high growth business owners around their scale up and commercialisation activities. Heath is a Fellow of Chartered Accountants Australia, New Zealand, and Responsible Manager (RM), Board and Investment Committee member for Bentleys full and unrestricted Australian Financial Services Licence (AFSL). Heath is a well-regarded and long standing active early stage investor (angel, seed and venture capital) and later stage private equity investor. Heath is also a CSIRO ON mentor, Brisbane Angels Member and a Queensland Government Mentoring 4 Growth mentor. Heath’s interests are particularly focused on the technology transfer from research institutions into commercial business outcomes.
For the complete, unedited article please contact Bluebook direct to obtain a copy.
It’s financial reporting season!
Financial institutions are under the most pressure this reporting season. There are a multitude of factors that make this year’s reporting season the most intense in recent memory.
The Financial Services Royal Commission, falling house prices in Sydney and Melbourne, increased scrutiny by the regulators, the class action environment, short sellers, the threat of macro-prudential regulatory measures, plummeting bond yields and an uncertain geopolitical environment. This is creating a financial environment of increased volatility.
Directors’ attention has been taken away from the day to day operations of running their business and instead spending a lot of their time dealing with corporate governance, continuous disclosure obligations and fending off the media and short sellers. This will all come to a head when companies issue their financial reports.
Protecting your business against cyber crime
As a modern-day Australian adult, it’s likely you’ve been tempted to make a spontaneous online retail purchase. Not surprising, considering around a quarter of the world’s population is believed to be shopping online. That’s 1.92 billion global digital buyers, within an estimated global population of 7.7 billion people.
As veteran online shoppers attest, it’s not uncommon to receive spam email after handing over personal details to an online retailer or even signing up to a newsletter. The lure of upfront discounts and suddenly you’re receiving emails promising a million dollars worth of free Bitcoin!
Have you ever wondered how these unrelated sources suddenly have your personal contact information? Simply put, our personal information is up for sale. Personal information is bought and sold on the dark web by identity thieves. Information as basic as our email addresses is of great value. How much value? In the US for example, social security numbers are $1. Drivers licences $20. Credit or debit card information $5-$100. Online payment services logins $20-$200. US passports – over $1,000!
Spam emails are the result of serious cyber security breaches. It is estimated that the largest cause of data breaches in Australia is from malicious attacks—representing 59% of breaches. As much as we think sophisticated online shoppers have the sense to ignore spam emails, around one in four people still get caught out.
Australian fashion retailer Princess Polly recently uncovered a data breach exposing customers’ personal information and payment details to hackers. Customers who made purchases between 1 November 2018 and 29 April 2019 are at risk of a possible leak of data. The company has warned customers to watch their credit or debit card statements and report unusual activity to their bank.
This is a nightmare scenario for any company, as the resulting reputational damage can be enormous. Many cyber breaches aren’t even notified to the public because of the potential damage to reputation. Reputational damage is even more acute for pure online companies that have no physical storefronts. Their reputation is often their most valuable asset. If customers lose faith in the online retail shopping experience, sales and profits plummet. End of business.
Everyone is at risk of cyber crime – individuals, small businesses and large corporates. So what can be done? A key solution for businesses comes in the form of insurance. Cyber insurance is a relatively new product in Australia but is becoming more pertinent after the Notifiable Data Breach (NDB) legislation was introduced in Australia in February 2018.
The NDB scheme applies to all organisations above a certain size with existing personal information security obligations. The scheme includes an obligation to notify individuals whose personal information is involved in a data breach where their data is likely to be misused. This is what happened to Princess Polly.
Cyber insurance is not a panacea but it’s critical in protecting your exposure to cyber crime. It protects your business against cyber threats, from loss of data to business interruption. It also covers cyber extortion, third party cyber liability, first party hacker damage, public relations expenses and data breach notification costs.
To put the financial cost of cyber attacks into perspective, it’s believed that cyber crime costs Australian businesses around $4.5 billion each year. Yet it is one of the least insured policy areas. The IBM 2018 Cost of a Data Breach study reports the global average cost of a data breach for a company is $3.86 million—up 6.4 percent over the previous year. The average cost for each lost or stolen record containing sensitive and confidential information also increased by 4.8 percent year over year to $148 per record.
So if you haven’t spent much time considering the impacts of cyber crime on your business, now’s the time. Most important is having a cyber response team ready to help manage and resolve the issue quickly and efficiently. This extends to legal and IT security experts and requires your approach to be planned out well in advance.
The first 24 hours are critical – contacting your pre-determined specialists, managing and coordinating stakeholders, commencing investigations, reviewing policy coverage, responding to the incident and, most importantly, managing your brand reputation.
To ensure your cyber insurance is tailored to your specific business risk, contact us and we can discuss the most effective options available.
Financial Reporting Season 2019 – Are you ready?
Annual reporting season for listed companies in Australia is approaching with August being the key month. Directors and boards are under more scrutiny than ever this season following the Financial Services Royal Commission.
It is not just the Big 4 banks that are being closely watched by shareholders, regulators and other stakeholders. Any significant sales or profit misses are being crucified by rapid re-ratings of shares on the stock market.
The evolution of the class action environment in Australia over the last several years has meant shareholders are much more educated and the obligations on boards to adhere strictly to the ASX continuous disclosure obligations puts added pressure on directors and officers.
Producing added pressure for listed companies is the increased proliferation of short sellers in the Australian stock market. Short sellers often have powerful outlets in financial media to affect a stock’s performance. This means CEOs and CFOs have to spend additional resources combating the short sellers and reinforcing their business models and financial plans to the public.
The fractious nature of the Australian economy means it is more difficult to budget for future revenues and changing business conditions. While typically the Australian economy was classed as two-tiered, economists have suggested that in recent times it is multi-tiered. While one sector of the economy might be experiencing boom times another sector may be in recession.
For Australian listed companies with a global reach, other events become more prevalent with reporting season – the global political environment, macro-prudential regulations and trade wars. These can all have a direct impact on sales and profit forecasts.
Overall share market performance can also have an impact on reporting season. In the last quarter of calendar 2018, global share markets fell by more than 20% and then promptly rallied by more than 20% in the early part of 2019. This increased volatility in stock markets is becoming more frequent and provides difficulties for listed companies in forecasting future business conditions.
To discuss how Bluebook can assist you in the lead up to or during reporting season, contact us on 3052 8009.
Bluebook Directors and Officers (D&O) market update – 1 July 2019
The Directors and Officers insurance market has had a tumultuous past, creating a challenging environment for Australian companies and their boards. Our latest update explains the history behind this and what reality now looks like for most Australian companies.
The Directors & Officers (D&O) insurance market was in a soft market for over a decade after the GFC in which insurers were in a race to the bottom – who could write the most premium for the cheapest price? Top line growth at the expense of bottom line profitability.
That all changed in 2018 with the realisation that insurers in Australia had lost money on D&O insurance for more than ten years. The avalanche of impending securities class actions only compounded the problem, meaning a substantial re-rating was necessary. That re-rating has been swift and all encompassing, sweeping up all in its path. Premiums for some listed companies have doubled in one renewal period, with rises even as high as 200%-300%.
However, the ‘correcting’ of the D&O market still has some way to go. It is likely there will be further significant rises in premiums in 2019 and 2020 as this hard market deepens and accelerates.
According to a recent Insurance News article, “the directors’ and officers’ market is continuing to deteriorate for Australian-listed companies as premiums keep rising and insurers moving to improve profitability become more selective.”
As well as substantial premium increases, many ASX listed companies have had to self-insure more D&O exposure, particularly in relation to Security Entity claims.
Because of the losses in D&O over the past decade there has been a re-evaluation of appetite. Where previously there was an abundance of capacity willing to participate at ever reducing premiums, now certain insurance markets are reducing capacity, unwilling to write Side C or pulling out of the D&O insurance market in Australia completely.
This is creating a challenging environment for Australian companies and their boards. They are facing higher premiums, less capacity, potentially lower limits and in some cases no cover at all for Securities Claims. This is putting more pressure on boards to ensure they have the right culture in place. The recent Royal Commission into Banking revealed a substantial breakdown in Australian Corporate Culture in the Financial Services Industry which now needs to be repaired. Adequate D&O cover has never been more important.
The reality is, it is likely that Australian companies will face a lengthy period of elevated D&O insurance premiums and coverage which is insufficient. Early engagement and a tripartite relationship is key for a successful placement.
If you have any concerns or questions about your current D&O program, please call David McKenzie on 3052 8009.
This website has been prepared for general information purposes only and not as specific advice to any particular person. Any advice contained in this website is General Advice and does not take into account any person’s individual investment objectives, financial situation or needs. Any legal information contained in this website is of a general nature only. It is not, nor is intended to be legal advice. Before acting on any of the information included in these articles you should consider whether it is appropriate to your particular circumstances, alternatively seek professional advice. Any references to past performance are not an indication of future performance. You will find further details of the service we provide and any cost to you within our Financial Services Guide. Prepared by Bluebook Insurance Brokers Pty Ltd ABN 18 623 039 707; AFSL 509657.