As part of the new Aged Care Act ("the Act"), which will commence on 1 July 2025, the government is introducing cost recovery measures (opens a new window) that require aged care providers to cover the costs of accreditation, provider approvals, and other regulatory activities.
These changes, alongside the introduction of a new model for provider registration (opens a new window), are likely to create additional financial and compliance pressures for aged care providers.
For Responsible Persons (as defined in the Act), these changes raise critical questions about Directors' personal liability risks, the financial viability of aged care organisations, and the adequacy of Directors' & Officers' (D&O) insurance coverage.
Additionally, other liability policies and even Property coverage may also be impacted by funding changes, requiring providers to reassess their risk transfer strategies.
Financial viability and the insolvency exclusion in D&O insurance
With rising regulatory costs and compliance burdens, financial viability will remain a concern for many providers.
If an organisation faces financial distress, D&O insurers often impose an insolvency exclusion, meaning directors and officers may not be covered for claims arising from financial collapse.
This is particularly concerning as directors could face personal claims from creditors, employees, or regulators alleging mismanagement.
Aged care boards must ensure robust financial planning and review their D&O policies carefully to understand any exclusions that could expose directors to personal risk.
Given the increased financial pressures from government cost recovery policies (opens a new window), engaging with insurers early to negotiate terms that offer optimal coverage is essential.
Impact of funding and income on insurance costs
Funding and income are key rating factors for many liability policies, influencing premium costs and coverage terms.
Insurers assess an organisation's revenue streams and financial stability when underwriting policies such as:
Directors' & Officers' (D&O) Insurance – Responsible Persons of aged care providers may be seen as a higher risk, leading to increased premiums and restricted cover.
Professional Indemnity and Public Liability Insurance – A reduction in funding could impact the ability to maintain compliant services, affecting the level of coverage Insurers are willing to offer. On the other hand, when funding changes bring new service expansion opportunities, organisations should closely assess the risks associated with new services and manage them up to the board level.
Industrial Special Risks (ISR) Insurance – Business Interruption cover, which is designed to protect against revenue or gross profit loss, could be affected by changes in funding models. The methodology of Business Interruption cover should be reassessed within the Act’s regulations, particularly concerning the return of RACs to residents and interest income lost due to damaged property.
The need for statutory liability cover
As regulatory scrutiny increases under the new aged care framework, providers face increasing risks of fines and penalties.
Statutory Liability insurance, which is designed to cover legal costs and certain fines and penalties arising from regulatory breaches, is even more necessary.
Providers must review their statutory liability coverage to ensure policies can respond to regulatory investigations, particularly as the Aged Care Quality and Safety Commission increases enforcement actions under the cost recovery model.
Providers and their directors could be left exposed to self-insuring substantial financial penalties without appropriate coverage.
New risks from expanding into new funding streams
The government's push for new funding streams, such as home care, presents an opportunity for aged care providers to diversify revenue.
However, new services introduce new risks that may not have been previously considered in existing insurance programs.
Key concerns may include:
Expanded liability exposure – Providing care in private homes introduces unique risks compared to residential aged care. This includes increased exposure due to one-on-one care in private settings, where supervision, monitoring, and visibility of staff interactions with consumers are often limited. This environment also introduces workers' compensation and workplace health and safety management complexities.
Coverage gaps – Existing policies may not automatically extend to include home care service operations, which may require adding policy adjustments or new types of insurance.
Regulatory compliance – The regulatory requirements for home care differ significantly from those for residential care, which may increase the risk of non-compliance and potential regulatory consequences.
While home care funding offers potential financial benefits, aged care providers must carefully assess how this expansion impacts their insurance costs and risk management strategies.
Key actions for aged care providers
With increased regulatory costs, financial pressures, and new liability risks, aged care providers must take a proactive approach to risk management and insurance.
Key actions may include:
Review D&O and statutory liability policies to cover insolvency exclusions, fines, and penalties to help ensure adequate personal liability protection.
Assess the impact of funding changes across all relevant insurance policies.
Strengthen governance and compliance frameworks to reduce the potential for exposure to regulatory penalties.
Update risk frameworks and insurance to assess and help mitigate risks associated with new funding streams like Home Care.
The importance of expert risk and insurance support
The new regulatory framework and cost recovery measures (opens a new window) are part of the broader and more complex challenges aged care providers must navigate as they prepare for the commencement of the Act on 1 July 2025.
Amid this period of profound transformation, the expertise of a risk and insurance specialist with deep industry knowledge and experience is critical to help mitigate emerging risks effectively.
If you need help in navigating the changes, please get in touch.
The contents of this publication are provided for general information only. Lockton arranges the insurance and is not the insurer. While the content contributors have taken reasonable care in compiling the information presented, we do not warrant that the information is correct. The contents of this publication are not intended as a legal commentary or advice and should not be relied on in that way. It is not intended to be interpreted as advice on which you should rely and may not necessarily be suitable for you. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content in this publication.
