What Is A Deed Indemnity and Insurance

What Is A Of Deed Indemnity and Insurance?

Mar 1, 2022
Reading Time: 6 minutes
Written by Angela Omari

Have you recently registered your own company in Australia? Congratulations. The early stages of starting a company are exciting.  

You’ve probably trademarked your logo and started marketing your brand, but have you thought about the important risk-reduction strategies?

As the director of the company, you want to be protected if anything goes wrong. Thankfully you can, if you have a Deed Indemnity, also known as a ‘Deed Of Access & Indemnity’ and ‘Deed of Insurance’ in place.

A Deed Indemnity can make a difference by affording protection and limiting liability.

So if you want to ensure that you’re personally protected, this post will explain everything you’ll need to know about a Deed Indemnity and why you need to have one in place.

Read along.

What is a Deed of Indemnity and Insurance?

A Deed of Indemnity and Insurance is a legal agreement between a company and a company director or company officer.  

This deed contains terms of how a company will indemnify a company director, which simply means will cover the costs incurred by a director or officer while they perform their role.

Why should a company director have a Deed of Indemnity?

Under the Corporations Act 2001 (Cth), a director is subject to many duties and obligations

These include the duty to:

  • Act in good faith and for a proper purpose
  • Act with reasonable care and diligence
  • Prevent insolvent trading
  • Prevent an improper use of position
  • Avoid all misuse of information
  • Prevent conflicts of interest

As a company director, if you breach one of these duties, this can result in serious legal penalties such as fines and bans. Legal costs in such issues as these can escalate rapidly.

If you breach any of the duties, you may also be personally liable for the debts of the company. 

To give an example, you may be personally liable for:

  • Debts incurred by the company when it was insolvent
  • The company is not withholding employees’ pay as you go tax
  • failure to pay employee superannuation guarantee charges
  • Losses the company suffers as a result of your breach of duty as a director
  • You will be personally liable for any debt you provided a guarantee for as a director

If you are found to be personally liable, you may risk getting a civil penalty, criminal penalty or be investigated by the Australian Securities and Investments Commission (ASIC).

Although there may be an indemnity clause in the company constitution, this may not apply to a director or officer that has left the company. 

However, your company can pay for these costs if you are covered by a Deed of Indemnity. This may vary depending on the scope determined in the agreement you choose to set up. 

Benefits of a Deed of Indemnity and Insurance

A Deed of Indemnity can clarify many misconceptions about liability and is a great way to avoid paying costs out of your pocket. 

Doubly, it works as a good incentive for you and other officers you hire to work at your company.

Other key benefits include:

  • Manage your personal risk and liability
  • You are a director of a company and want to protect yourself from personal liability in case challenges arise
  • You want to have access to relevant documents in the event of a claim
  • You want to explicitly outline your director’s duties and obligations when liabilities arise 
  • You want to proactively incentivise and ensure you’re not personally liable for breach of your duties 
  • You want to access the company books and records
  • As a company’s constitution can be amended without your specific consent, having a Deed of Indemnity can offer you protection, particularly for that period of time after you cease your role as a director for the company

Limits on the Deed of Access and Indemnity

The Corporations Act 2001 (Cth) limits indemnity in a few ways. It prohibits indemnifying a director against:

  • The liabilities that you owe to the company. 
  • The Deed of Indemnity won’t protect you if you breach your directors’ duties 
  • It won’t protect you if you breach other legal obligations under the Corporations Act 2001 (Cth)
  • Liability for specific pecuniary penalty orders or compensation orders 

Other categories that the law prohibits the company from paying for include:

  • Liability for fraudulent, dishonest or criminal behaviour
  • Liability for specific compensation and penalty orders
  • Liability to the company
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What to include in your Deed of Indemnity

1. Clear definitions

As with any contract, deed or agreement, having unambiguous and clear definitions is crucial. 

What is of particular importance concerning Deeds of Indemnity is that the following terms be clearly and precisely defined: 

  • Liability
  • Claim
  • Company
  • Indemnify a company director
  • Liability indemnification and advancement of defence costs 

It is recommended that you hire a lawyer to gain some legal opinions before setting out your Deed of Indemnity to ensure it meets your specific circumstances.

2. Indemnity clause

It would be best to detail to what extent your company is willing to cover the liability and legal costs of a director or officer when they are carrying out their role. 

For example, the Deed of Indemnity should specify that the company will protect the director or officer ‘to the maximum extent as permitted by law’. 

However, the scope can be tailored for each company.

It is important to note that the Deed of Indemnity can’t cover some circumstances. These were discussed above.

3. Indemnity against legal costs and liabilities

A director’s indemnity means the company promises to reimburse you for any legal costs and liabilities you incur as a director. These may include:

  • Costs of participating in an investigation 
  • Legal fees associated with defending yourself if you are sued as a director in legal proceedings

This is why the indemnity must be as broad as possible. For example, you may wish to include the following:

  • The company will defend all claims arising out of any acts or omissions to the fullest extent permitted by law
  • If legal costs occur, the company will pay them rather than reimburse you later
  • Consider bringing your reputation into consideration when negotiating the deed 
  • You may want some control over how the case proceeds if your future career depends on the outcome
  • The right to consent to (or reject) any settlement
  • In case of a conflict of interest, engage your own lawyer to gain legal advice

4. Directors and officers’ insurance (D&O Insurance Policy)

Directors’ and Officers’ Insurance (D&O Insurance) work as another form of protection for the director or officer and can provide additional protection for the above-prohibited fields, amongst other situations. 

Having Director’s and officers’ insurance is an insurance (warranty) cover and will protect you against liabilities that aren’t mentioned in the Deed of Indemnity.

The Deed should always cover the insurance’s scope or terms and conditions, including any obligations to maintain the insurance.

Depending on the insurance policies offered by the individual insurers, the scope of the protection will vary.

5. Access to Documents

Directors have rights of access to company documents to assist their case if they are taken to court.

The Deed of Indemnity can provide either a broader or narrower access to various documents, depending on the company’s needs.  

However, the Deed should specifically set out that you will have director access to the following documents:

6. Execution clause

Execution is of vital importance. A deed or contract has no use if it’s not executed. 

The execution clause lives at the end of the document, giving effect to the terms listed above. Parties to the Deed need to sign the execution clause to make it legally binding.

If you require a Deed of Indemnity to indemnify you, there are simple and smart ways you can do this. If you have more questions or want professional advice, our commercial lawyers can assist you.

Way forward

Having an Indemnity Deed in place will help you manage your risks as a new director, especially if your company is sued or investigated despite your good faith.

 In a well-drafted Deed of Indemnity and Insurance, you will have:

  1. Access to company records
  2. Insurance cover
  3. Indemnified against legal costs
  4. Required to acquire director’s and officers’ insurance
  5. Protections for at least 7 years after you resign as a director and were a former director

If you need a Deed of Indemnity, you can use our Deed of Indemnity document and ensure you’re protected right away.

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