Directors & Officers Liability Insurance

CLB Asks Ankur

Drugs to Repay
FII Investments in Depositors, failing
India this year has to prosecute the
reached close to directors for
$9-billion. default in
payments.

Coal India Minority

Shareholders Directors of AMRI
preparing to file Hospital were in jail
petition against on charges of
presidential culpable homicide,
directive of signing following a fire in
fuel supply the hospital that
Agreement killed at least 90
people.

SEBI unearths Rs 1000 Cr

scam at Austral Coke
What is Expected of Directors
• honest and ethical conduct
• avoidance of conflicts of interest
• full, fair, accurate, timely, understandable
disclosures
• compliance with applicable laws, rules and
regulations
• prompt internal reporting of code violations
• accountability for adherence
 Duties of Directors
Fiduciary Duties Common Law Duties

Good faith and bona fide Duty to exercise reasonable skill

acts Proper use of powers and care
Unfettered Discretion Duty to act within the powers of
Lack of Conflicting Interests the company
Duty to exercise
independent Judgment
Duty of Supervision
Duty of Confidentiality

Specific Duties prescribed under Restriction on Activities and

the Companies Act Disclosure of Information

Filing returns with the Registrar Declaration of Interest

of Companies Receipt of Compensation
Convening Shareholders’ Attending Board Meetings
Meetings Approval of Company’s
Documents Audit Requirements Notice of resolution for Winding
Up Declaration
Notice of appointment of Liquidators
 Laws affecting Liabilities of
D&O
■ TORT
■ CIVIL LIABILITY
■ CRIMINAL LAIBILTY
■ LIABILITY UNDER CONTRACT
■ LABOUR LAWS
■ COMPANIES ACT(COMPANIES BILL,2011)
Corporate Governance

■ Evolved through efforts of several committees appointed by MCA

and SEBI
■ Even the best standards cannot prevent instances of major
corporate misconduct.
■ US - Enron, Worldcom,Tyco and, more recently gross miss-
selling of collateralised debt obligations; in the UK; in France; in
Germany; in Italy; in Japan; in South Korea; and many other
OECD nations.
■ Satyam is a one-off incident considering the size of the
malfeasance.
■ commitment of a company to run its businesses in a legal, ethical
and transparent manner
 Naresh chandra Committee
report
■ The Board, its audit committee and its executive management must
collectively

• identify the risks impacting the company’s business

• document their process of risk identification, risk minimization, risk
optimization as a part of a risk management policy or strategy.
• The Board should also affirm that it has put in place critical risk
management framework across the company.

■ Corporate Governance requirements affecting full Board of

Directors

■ Audit Committee oversight, composition/integrity, reporting

mechanism, pre-approvals

■ Bans on loans to Executive Officers/Directors (Compensation

Committee)
■ Appointment of Independent Director
Cont..
■ Personal penalties on directors and employees who seek unjust
enrichment and commit offence

■ non-executive directors cannot be made to undergo the ordeal of

a trial for offence of non-compliance with a statutory provision
unless it can be established prima facie that they were liable for
the failure on part of the company.

(Nareshchandra Gupta Committee Report)

 Companies Bill 2011 and
Liabilities of Directors & Officers
■ Investor Protection Measures

■ Whistle blower proposal for ethical corporate behavior

■ Class Action -Chapter XVI- Prevention of Oppression and

Mismanagement-The Bill provides for class action by specified
number of Members or Depositors against the company except the
banking company.

■ Certification for compliance &disclosure

Expanded Role
■ Greater Personal Accountability
■ Deemed knowledge of violations
■ Distinct role of each director as against collective
functionality of the Board
■ Claimants to Corporate Governance widened from
Shareholders/ Investors to all Stakeholders
■ Duty of care expanded from that of a prudent and
reasonable man to that of an expert
■ Stricter monitoring and supervision required on the
part of non-executive / independent Directors
D & O Liability Insurance

Directors and Officers can be sued

personally
by any stakeholder for a decision
taken by them on behalf of the
Company in their managerial
capacity
Coverage Type

■ Side A- Legal Liability Brought

out on Directors and officers of
the company
■ Side-B- Company
Reimbursements
■ Entity Coverage-or allocation
 Disputes or probable
claimants
■ Shareholders
❖ Direct and Class actions: on their own behalf

■ Employees: for labor related issues such as:

❖ Sexual Harassment

❖ Wrongful Termination / Promotion

❖ Discrimination

❖ Failure to promote

❖ Breach of employment contract

■ Third Parties
❖ Competitors (Interference, etc.)

❖ Customers

❖ Government (banking law violations, civil

rights issues, etc.)
❖ Creditors
Grounds for Liabilities
Actual or alleged:
■ Misuse of corporate funds
■ Companies Act violations
■ False statements to Government agencies
■ Irregularities in securities issues
■ Breach of duty to minority shareholders
■ Misuse of inside information for personal gains
■ Imprudent expansion leading to erosion of
shareholder wealth
Cont..

■ Bankruptcy

■ Management integrity issues

■ Employment irregularities/harassment

■ Auditing and Accounting practices

■ Mergers & Acquisitions

■ Violation of legal statutes

■ Listing of stock or debt on a stock exchange

What it Pays?

■ D&O Insurance provides indemnity to

Directors and Officers for:

❖ legal and defense costs must be

reasonable and should be incurred with
the consent of Insurer

❖ Damages, judgements and settlements

arising from claims brought against

Directors, due to wrongful acts in their
capacity as Director or Officer of a
company.
What constitutes claim
• A written demand or civil, criminal,
regulatory or arbitration proceeding
seeking compensation or other legal
remedy for a specified wrongful act;
• Administrative or Regulatory proceedings
or investigations of any wrongful act
done
• Emergency cost,
• Regulatory crisis response,
• Bail Bond Civil Bond Expenses
• Prosecution cost
• Public Relation Expenses
• Excludeing fines and penalties
 Important to understand while
seeking coverage
■ Limit of Liability-What is the Right
Limit?
■ Defense Cost-within limits of liability
■ Retention or deductibles
■ Claims Made basis
■ Duty to Defend vs Right to defend
■ Retroactive Date
■ Discovery Period
■ Primary Insurance and Excess
Insurance
 Most Important Aspects in
selecting D&O Insurance
■ Coverage-Directors
■ Officers
■ Company
■ Add on
■ Retention-Side A,side B,
■ Protection for non executive Director
■ Territory
■ Pricing
 Add on
• Cover for Subsidiaries

• Acquiring a new company or Merger

• Outside Directorship coverage

• Cover for Retired Directors

• Employment Practice Liability (EPL) cover for directors and

officers

• Cover for Regulatory Crisis Response

• Cover for Assets and Liberty Costs including prosecution,
bail bond and civil bond expenses

• Cover for damage to reputation

• Severability
• Spousal Extension
• Extension to estate of the deceased director
Extensions
Entity Securities Extension
Entity EPLI Extension
IPO extension
 Outside the scope
• Prior Acts & Prior Litigation

• Fines & penalties

• Major Shareholder

• Personal Gain

• known wrongful acts

• Insured vs Insured

• Property Damage or Bodily Injury claims

• Professional Liability

• Security Related claims-Insider Trading or short swing profits

• Suit brought out by Regulator

• Public Offering of securities

 2011 Survey Results of D&O
Policy in UK-Willis
• Sample size 100
• Some 20% of respondents already
had experience of a claim or
investigation involving a director of their
company.
■ A third of those affected made a claim
under their D&O insurance policy, and
35% sought indemnity from their
company, suggesting almost equal
take-up of insurance and indemnity
protection
■ Regulatory investigations and
enquiries were identified by 84% as
greater risk
■ Criminal and regulatory fines and
penalties were the second biggest
worry, identified by 64%
■ 67% worry whether their D&O policy will
be able to respond in all jurisdictions
Towers Watson survey-USA
(Sample 481 Listed, Private and Not for
Profit) Highlights

■ Average Policy limits $98 mn

■ Cos with more than $10 bn in assets
reported average limit of $187 mn
■ Private cos Limits Avg $ 36 mn
■ Automobiles and Transport Equipment cos
were the largest limits of avg$210 mn
■ By market Capitalisation cos with more
than $ 10 bn avg limits of $222 mn
■ Near 48% of participants with more than
$10 bn in Assets faced claims on their
D&O