D&O Insurance: The Gap the Law Creates, and Many Policies Don't Fill

D&O Insurance: The Gap the Law Creates, and Many Policies Don't Fill The Corporations Act bars indemnifying directors for claims by the organisation itself. Many D&O policies exclude this too Directors and officers insurance is widely assumed to be a complete safety net, and this assumption is dangerous. The Corporations Act specifically prohibits an association from indemnifying its own directors for certain liabilities, and a documented, common gap means many D&O policies do not actually fill that gap either, leaving individual directors exposed where they might assume they are most protected.

01 The Legal Restriction Most Directors Do Not Know Exists 02 The Gap Many D&O Policies Specifically Do Not Fill 03 The Shared Limit Risk Worth Understanding Precisely Use this resource as a board pre-read, discussion guide or governance review prompt.

The Legal Restriction Most Directors Do Not Know Exists Tax, Structure & Compliance · 14 September 2027 Section 199A of the Corporations Act prohibits a company from indemnifying a director or officer against liability owed to the company itself, among other specific exclusions. This is a hard legal restriction, not a policy choice the association could simply write around in its constitution. A director facing a claim brought by their own organisation, rather than by an outside third party, cannot rely on the organisation's own indemnity to cover that specific liability, regardless of how the constitution is worded.

The Gap Many D&O Policies Specifically Do Not Fill D&O insurance can, in principle, fill exactly this gap, providing direct cover to an individual director where the organisation is legally prohibited from indemnifying them. In practice, many policies specifically exclude this scenario through an insured-versusinsured exclusion, denying cover where a claim is brought by the organisation, or a related party, against one of its own directors. A board should read this specific exclusion in its own policy directly rather than assuming the insurance automatically covers what the constitution cannot. Assuming your D&O policy automatically covers the exact gap the Corporations Act creates is a reasonable assumption to make and a dangerous one to leave unverified. Many policies close this gap with an exclusion clause most boards never actually read.

The Shared Limit Risk Worth Understanding Precisely A typical D&O policy contains distinct coverage components, direct cover to individuals where the organisation cannot or will not indemnify them, reimbursement to the organisation where it has indemnified a director, and coverage for claims against the entity itself. These components frequently share a single, aggregate limit across the entire policy, meaning a large claim under one component can exhaust the funds available to protect an individual director under another. A board should confirm how its own policy structures this, since an apparently generous overall limit can still leave an individual director under-protected if most of it has already been consumed elsewhere. •

Read your association's actual D&O policy for an insured-versus-insured exclusion, confirming whether it covers claims brought by the organisation itself against a director, not just third-party claims.

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Confirm whether your policy's coverage components share a single aggregate limit, and assess whether this leaves individual directors adequately protected if a large claim arises elsewhere in the policy.

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Ensure your association's constitution and any separate indemnity deed dovetail with the actual D&O policy in place, since a mismatch between what is promised and what is covered creates a real gap.

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Treat your D&O policy's claims-made structure with seriousness, building a clear internal process for prompt notification of any claim or circumstance that could become one, since delay can itself jeopardise coverage.

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Review retroactive dates and continuity provisions carefully whenever changing insurer or renewing cover, since a gap here can leave historical conduct uninsured despite continuous coverage appearing to exist.

D&O insurance is a valuable protection for the volunteer and paid directors who serve an association, but it is not automatically comprehensive, and the specific gaps this article has identified are exactly the kind that surface only once a claim has already been made. Confirming the actual scope of your policy now costs considerably less than discovering its limits during a dispute.

This is one of the practical governance topics built into our Board Director course — alongside the papers, tools and frameworks that turn the principle into your board's actual practice. Explore the course → — Annie Gibbins General education — not legal, financial, tax, clinical or governance advice. Confirm specifics at the relevant primary source or with your own qualified adviser. Nexus Leadership is operated by Lipstick Consulting Pty Ltd · ABN 15 619 120 482.

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ACTION WORKSHEET Turn the article into evidence, a decision and an accountable next step.

D&O Insurance: The Gap the Law Creates, and Many Policies Don't Fill Editable boardroom action record 1. What is the issue or decision? State the governance question in one clear sentence.

2. What evidence do we already have? Record the facts, source documents and stakeholder evidence available now.

3. What evidence is still needed? Identify the legal, regulatory, financial, member or operational information still required.

4. What is the agreed next action? Capture the owner, timeframe and how the matter will return to the board.

ACTION REVIEW OWNER DATE Name / DD / role MM / YYYY

BOARD DECISIO N Decision / resolutio n