Liability and protection from legal claims or proceedings

To assist in attracting the best quality candidates to serve on boards and to ensure that boards act without fear or favour, the Crown Entities Act 2004 (CE Act) contains a standard regime for immunity, indemnities and insurance.

All boards are expected to govern well and to the best of their abilities. However, even the most careful and law-abiding board can find itself involved in legal claims and proceedings. All board members need to be aware that failing to comply with their duties may lead to personal liability, civil proceedings or criminal prosecution. Individual board members can also be held liable for actions of the board as a collective.

The CE Act also provides for entities to indemnify or insure their members, office holders or employees at their discretion.  Protection from liability of board members, office holders and employees is addressed in ss. 120 - 126 of the CE Act.  Where entities carry a higher risk of legal liability which warrants more protection from liability, their establishing legislation will contain further provisions.

Although Crown entities are legally separate from the Crown, in some cases a court may decide that the Crown is liable for the agency. This will depend largely on its statutory functions and the extent of control exercised over the entity by Ministers and other central government agencies.

Every board should spend time discussing these matters as they relate to themselves and their employees, preferably with the assistance of a trained specialist, perhaps the entity's legal advisor.

Protection from liability

Section 120 of the CE Act provides that a member is not liable for any liability (civil or criminal) of the entity by reason only of being a board member.

Extent of immunity

The Crown entity itself has no 'blanket' immunity; nor do members, employees, or office holders have immunity from criminal liability.

However, the CE Act does provide that where a board member (office holder or employee) acts in good faith and in performance, or intended performance, of the entity's functions, that board member is immune from civil liability in respect of that act or omission unless:

• it is also a breach of an individual duty of a board member under any of ss. 53 to 57 of the CE Act (s. 121 CE Act); or
• the responsible Minister or entity personnel apply to the court for an order to ensure a member's compliance with the law (s. 60 CE Act).

Indemnities

An indemnity is an agreement by one person to pay another person any sums owed to a third party. "Indemnification" means that the entity relies on its own resources to pay board members' and any others' legal costs for claims that result from board/entity actions, unless the board has decided to take out indemnity insurance.

The CE Act provides that members of an entity are immune from civil liability unless they have breached an individual duty set out in the Act. It also contains express powers for a board to indemnify its members, employees, office holders and committee members at the board's discretion for acts or omissions done in good faith and in the performance or intended performance of the entity's functions (s. 122). Such indemnities can only be for liability for conduct and for costs incurred in defending or settling a claim relating to that liability. Indemnities can cover costs of claims in the absence of court proceedings and also court and disciplinary proceedings (criminal and civil, pre-trial, substantive, and on appeal), provided that the statutory prerequisites are met.

Outside the context of the CE Act, few entities' statutes have explicit indemnity provisions. The board should check the general empowering provisions in the entity's legislation (e.g. all powers reasonably necessary to perform the agency's functions) and seek legal advice on whether the entity's legislation includes powers to indemnify.

Board members should be aware of the extent of any indemnity. If a member, office holder or employee is indemnified or insured for acts or omissions or in relation to costs that the entity is not authorised to indemnify or insure against, then the member, office holder or employee must repay the entity to the extent that the indemnity or insurance cover exceeds what the entity is statutorily authorised to provide (s. 125, CE Act).

Insurance

Insurance provides financial protection for board members and others who are covered, in the event that they are sued in conjunction with the performance of their duties as they relate to the entity.

The CE Act contains express powers for a board to purchase insurance for members, employees and office holders at the board's discretion (s. 123).

A board may effect insurance cover to cover situations where the person involved has not acted in bad faith and the relevant act or omission was done in the performance or intended performance of the entity's functions.

Outside the context of the CE Act, few entities' statutes have insurance provisions. A board should check the general empowering provisions in its legislation (e.g. all powers reasonably necessary to perform the agency's functions) and seek legal advice on whether they include powers to insure.

If insurance is effected beyond what the entity can provide under the CE Act, the insured member/employee/office holder must repay the difference to the entity (s. 125). It is, therefore, important that board members be aware of the extent of any insurance cover.

In the event that insurance is not provided, the board must ensure that the individual member is made aware that he or she is not covered, as well as of any relevant statutory protection from liability, so they can consider whether to make their own provision for such insurance.

Governance manual content: Liability and protection from legal claims or proceedings

At a minimum a good governance manual should cover:

• the approach taken to indemnity for board members, office holders and employees;
• the approach taken to any insurance for board members, office holders and employees;
• who the board has indemnified or provided effective insurance for in relation to employees and office holders; and
• the extent of the indemnity or insurance with an explanation of what acts, omissions and costs are not included.