directors & officers management liability insurance phd chamber, new delhi farzan p. khansaheb...

Directors & Officers Management Liability Insurance

PHD Chamber, New Delhi

Farzan P. KhansahebChief Underwriting OfficerRaheja QBE General Insurance Company Ltd.

Agenda

• Personal Liability of Directors

• Insurance Protection – Directors and Officers Liability

Insurance

• D&O Liability Exposures and Claims Examples

• Important aspects to consider while buying/reviewing

D&O Insurance

Duties of Directors

Directors can be held liable both jointly and severally, for any act,

commission or omission which is prejudicial to the interests of the

company and violates any of the duties to be discharged by them.

Stakeholders include

– Shareholders

– Employees

– Regulatory authorities

– Customers

– Creditors

Management of D&O Liability Risk

• Risk Identification by the company and directors – probability and

severity based on

• Industry, Company History, Listing Status, Regulatory aspects, etc.

• Risk Control through corporate governance, internal audit, controls

and review

• Risk Transfer to third party/parties through

• Corporate Indemnification

• Insurance

Risk Transfer for Directors

Corporate Indemnification

• Interests of the company and directors are closely aligned

• Erstwhile Companies Act 1956, S.201 – company can indemnify its director for

any liability incurred by him in defending civil or criminal proceedings, only if he

is acquitted or discharged

• Companies Act 2013 – no provision corresponding to S.201. The premium paid

on an insurance policy shall be treated as part of the remuneration of the officers

only if such officer is found guilty

• Limitation of Corporate Indemnification

• In case of company insolvency/lack of adequate funds

• Relationships gone sour

Insurance Protection

• Secures a second line of defence to protect D&Os against personal liability

• Covers Directors & Officers for loss that they incur as a result of claims made against

them personally by third parties for wrongful acts that they have committed or are

alleged to have committed while managing the company

• Includes legal costs they incur in defending the claims

• The policy also reimburses the company for Corporate Indemnification

Risk Transfer for Directors

Scope of Cover

Scope of Cover

This Policy pays for Loss of the Directors & Officers of a Company that arises out of

their wrongful act or omission committed in their capacity as directors or officers of

the Company.

Wrongful act includes:

• Misstatement

• Misrepresentation

• Breach of trust or duty

• Breach of warranty/authority

Directors & Officers Liability Insurance

Scope of Cover

Scope of Cover

Loss includes:

• Damages, judgements and settlements

• Defense costs and expenses

• Cost of legal expertise


Scope of Cover

Scope of Cover

• Director & Officer means any natural person who is a director or officer of the

Company:

• Insured Person means:

• any past, present or future Director or Officer, secretary or employee of the

Company or any natural person who by the virtue of any applicable legislation

or law is deemed to be a Director or Officer

• in the event of the death, incompetence or bankruptcy of a Director or Officer,

his estate, heirs, legal representatives or assigns, but only for Loss incurred

by such Director or Officer in his capacity as a Director or Officer

• the lawful spouse of any Director or Officer provided that the Claim is to

enforce a judgment against that Director or Officer for Loss incurred in their

capacity as such


Coverage: Extensions

• Blanket Subsidiary Cover

• Employment Practices Liability

• Intellectual Property

• Libel and Slander

• Official Investigations and Enquiries

• Previous Securities Offerings

• Retired Director & Officer Cover

• Severability and Non-Imputation

• Pollution Defence Costs


Coverage: Extensions

• External Positions / Outside Directorship Liability

• Entity Protection for Employment related matters

• Entity Protection for Securities Claims

• Prospectus Liability for Current / Future Offerings


Major ExclusionsMain Exclusions

• Prior and Pending Litigation

• Bodily Injury claims

• Professional Services related claims

• Loss arising out of Property Damage

• Claims arising out of Securities Offerings

• Actions brought by Major Shareholders

• Claims caused by unscrupulous behavior of any Insured Person


D&O – A ‘Claims-Made’ Policy

• D&O liability insurance policies are written on a ‘Claims-Made and Notified’ basis

• The policy will only respond to claims made against the insured and notified to the

insurer during the policy period

• If the insured becomes aware of circumstances that may give rise to a claim, the

insured shall notify the insurer of those circumstances and subsequent claims

arising out of those same circumstances will be covered under the same policy

• For a claim to be covered it must arise from acts of the Insured on or after the

retroactive date as mentioned in the policy schedule.

What is happening Globally

Multinational Environment

• Sharper Scrutiny by Regulators

• Evolving Corporate Governance – Public Company Accounting Reform and

Investor Protection Act laws in USA also known as Sarbanes Oxley (SOX)

laws

• Standards for external auditors’ independence

• Corporate officers’ responsibility for accuracy and validity of financial

reports

• Enhanced financial disclosures

• Conflict of interests

D&O Exposures

What is happening Globally

Multinational Environment

• Greater Public Disclosures – Foreign Corrupt Practices Act 1977: FCPA

• Accounting transparency requirements

• Bribery of foreign officials

• Corporate Manslaughter – The Corporate Manslaughter and Corporate

Homicide Act 2007 of UK

• Homicide as a result of serious management failure resulting in breach of

duty of care

• Occupational Safety & Health Act, 1970 (USA) – Safety and Health standards

at work

D&O Exposures

What is happening Globally Specific Exposures related to the US

• Uncertain and complex legal system

• Jury decides on verdict

• Provision for punitive and exemplary damages

• Class Actions prevalent

• Provisions for imposition of liability against a Parent (Non-US) and its D&Os

based on the conduct of US subsidiary

• Extra-territorial reach of US securities laws – If conduct amounting to fraud

takes place in the US or victims of the fraud are American citizens

D&O Exposures

What is happening in India

Indian Environment

• Enforcement Directorate

• Law enforcement Agency of the Government for enforcing economic laws and

fighting economic crime

• Enforce Foreign Exchange Management Act and Prevention of Money Laundering

Act

• SEBI – Clause 49 of the Listing Agreement

• For improving Corporate Governance in listed companies

• Responsibilities of independent directors, audit committees, quality of financial

disclosures

D&O Exposures


Indian Environment

• Serious Fraud Investigations Office – a multi-disciplinary organization with experts from

several sectors, including finance, law, accountancy, customs and tax for investigating

frauds

• Sexual Harassment of Women at Workplace Act, 2013

• Act defines sexual harassment at the workplace

• Employer is required to constitute an Internal Complaints Committee at each office or

branch. The Committee has rights of inquiry.

• Penalties range from one to three years imprisonment and/or a fine

D&O Exposures


Indian Environment

• Right to Information Act

• An Act of the Parliament of India “to provide for setting out the practical regime

of right to information for citizens”.

• Applies to government bodies, non-government bodies substantially funded by the

government

• Privatized public utility companies

• Highly watchful and active Media & Social Media

• Companies Act 2013

D&O Exposures

Salient Features of the Companies Act 2013

• Aim: Better Corporate Governance and Broadened regulatory framework

• Specifies duties for directors (Companies Act 1956 did not specifically codify the

duties)

S.166 requires a director to exercise his duties with

• Care and caution

• Skill and diligence and

• Act in good faith to promote company’s objects to benefit members, company, employees, and the community and for the protection of environment

• Not be involved in a situation to have any direct/indirect conflict of interest with the interest of the company

Higher responsibility and accountability on the part of the directors

Companies Act 2013


Concept of Key Managerial Personnel - in relation to a company under

S.2(51) means

(i) the Chief Executive Officer or the Managing Director or the Manager;

(ii) the Company Secretary;

(iii) the Whole-time Director;

(iv) the Chief Financial Officer; and

(v) such other officer as may be prescribed;

CA 1956 recognized only Managing Director, Whole Time Director and Manager as the Managerial Personnel

CA 2013 includes KMP within the meaning of “Officer in Default”

The net is now cast wide to include many officers whose responsibility and accountability has increased

Companies Act 2013


Liability of Independent Directors:

• Provisions on the requirements & eligibility criteria for Independent Directors

- He/she should be a person of integrity, relevant expertise and experience

- He/she is not or was not a promoter of, or related to the promoter or director of the company or its holding, subsidiary or associate company

- He/she has or had no pecuniary relationship with the company, its holding, subsidiary or associate company, or their promoters, or directors

• CA 1956, independent directors were not considered to be “officers in default” and

consequently were not liable for the actions of the Board

• CA 2013 however, provides that the liability of Independent Directors would be

limited to acts of omission or commission by a company which occurred with their

knowledge, attributable through Board processes, and with their consent and

connivance or where they have not acted diligently

Companies Act 2013


• Class Action Suits

• Constitution of the Tribunal as well as a National Company Law Appellate Tribunal (“Appellate Tribunal”)

• S.245 allows members/depositors to apply to the Tribunal to complain about conduct of the affairs of the company and its management

• Permits the aggrieved to seek any remedy the Tribunal may deem fit

• Increased Regulation of Private Companies:

• Unlike the 1956 Act – many provisions at par with public company

• Fund raising restrictions

• Shareholder approval – sale, lease or disposal of an undertaking or its substantial part or for borrowings in excess of specified thresholds and for inter-corporate loans and investments.

• Loans to Directors – no exemption for Private Companies

• Private subsidiaries of Public companies – deemed to be a public company

Companies Act 2013

Who may claim against Directors & Officers?

• Shareholders – Individual shareholders may bring action against individual

company directors & officers as a result of wrongful acts or omissions which have

the potential to erode the value of their shares

• Employees – For employment related matters such as unfair dismissal, unlawful

discrimination, sexual harassment

• Regulatory Authorities – Investigation, inquiry or prosecution by regulatory bodies

such as the SEBI, Revenue Department, etc.

• Customers – For misrepresentations made in advertising material or deceptive

trade practices

• Creditors – For furnishing wrong information to procure loans

• Competitors – For defamation or misleading advertising that unfairly compares the

company’s product to that of the competitors

Who can claim under the Policy?


Technology and Services Provider

• The commercial arm of a government organisation (Company A) entered into a

commercial deal for purchase of technology and services from an Indian company

(Company B)

• Two of the Directors of Company A also had ownership interests in Company B

• The Government of India cancelled the contract after the conflict of interest came to light.

• Company B filed a case of wrongful cancellation of the contract

• This was followed by a series of investigations from CBI, IT, etc. against Company B and

its Directors and employees

• The matter is still being investigated and may lead to large claims and defence costs

Recent Cases of D&O Liability – India


UK Subsidiary of an Indian IT Company

• The employee (a UK National) filed a case of wrongful dismissal against the UK

subsidiary of the Indian IT Company

• She also claimed the she was not appropriately paid during her employment and due to

the excessive work stress had developed health problems

• Her claim was for almost INR 1 crore

• The Company initially pursued the case in court but later settled the matter out of court for

INR 20 lakhs. However, INR 60 lakhs were spent on defence costs.



Indian BPO

• An employee of an Indian BPO filed a case against the Company for wrongful termination

of employment when she joined back after her maternity leave

• She was a General Manager at the company and alleged that she was terminated in spite

of good performance and promotions

• She claimed for INR 50 lakhs of compensation

• The matter was settled out of court



A major Indian IT company

• Two very senior executives were hired on contract for three years

• In the first year itself differences arose with CEO

• Allegations and counter allegations were made

• Executives’ contracts were terminated

• Sued CEO, entire Board and the Company

• Obtained favorable order in lower court

• Stay obtained from Bombay High Court

• Damages claimed INR 20 crores


A major Indian engineering company

• Company entered into contracts with two vendors

• Both vendors owned by same person but registered as two separate legal entities

• Company had to pay money to one of these vendors and collect from the other

• It offset the receipts against payments

• Vendor that did not receive payment filed criminal case against MD and Board

members

• Lower court issued non-bailable warrants

• Stay obtained from Higher court

A major Indian IT company

• Sued by an American employee working in the US

• Lower level, unskilled foreigners being sent to the US

• B1 visa being used instead of H1B

• Allegations of violations of Federal tax provisions

• Allegations of overcharging customers

• Allegations of harassment at work, discrimination

• Civil case in a US state

• Huge Defence Costs


A Co-operative Bank

• Bank had extended a loan to two persons – husband and wife, who ran a Small Scale Unit

• They became defaulters. After the customary warnings and notices, Bank moved the court

for recovery of loan

• On review of Bank’s application, Court gave an order to attach their property, pledged

under the loan. Bank officials, with the help of court officials and Police implemented the

order in the month of June 2008

• In retaliation, the defaulters filed a criminal case against the Managing Director, CFO and

Head Legal of the Bank for Extortion, House Breaking and Criminal Trespass


• An investor decided to invest in a company after much research and analysis

• He met the board of directors and decided to acquire 15% of the company

• Few months later the company lost a major contract and also faced losses

• After the investigation it was found out that the Directors would likely lose the contract prior

to the investor’s purchase of capital and they failed to advise the investor of this

• The investor sued the directors alleging that they should have advised him of this situation

prior to his investment



• A female employee complained to her executive director that her manager who was

the most trusted employee sexually harassed her

• The director told her that he would look into the matter but ignored and put off the

investigation

• She complained again but was again ignored

• She quit and threatened to sue

• The director now faced with a possible lawsuit, investigated the matter and found that

they were true and fired the manager

• But the female employee sued her executive director and other Board members for

allowing sexual harassment at the workplace and failing to investigate in a timely

manner


Cases in the news

• NSEL (National Spot Exchange)

- Company promoted by Financial Technologies

- The exchange defaulted on 31 July 2013 – the underlying commodities existed only on paper

- Around 15,000 investors (including PSUs) were victims of the scam

- 24 borrowers were given funds by NSEL. (INR 1,000 Cr to son-in-law of the Chairman)

- Arrests and CBI investigations of Promoters, Directors and Officers



Cases in news

• Wal-Mart India

- May 2013, Enforcement Directorate investigating violation of FDI norms

Wal-Mart had invested Rs 455.8 crore in Cedar Support Services, a subsidiary of Bharti Ventures and the holding company for Bharti Retail, which runs the front-end Easyday stores. The investment was made allegedly before the government put in place the law regarding FDI in the multi-brand retail. The investment was termed illegal because it went against FDI rules under the Foreign Exchange Management Act and the Prevention of Money Laundering Act.

The JV was called off amidst all the glitches.

- Wal-Mart’s Indian JV suspended several of its officers (including the CFO) as part of the internal corruption investigation



• Insurer’s Capability

• Credentials of the Insurer in D&O line of business

• Claims-handling capabilities in and outside India

• Long-term commitment to the market

• Coverage aspects

• Retroactive Date

• Outside Directorship/External Positions

• Coverage Territory/Jurisdiction

• Definition of Directors and Officers

• Definition of Wrongful Act

Important Aspects while buying/reviewing D&O Policies


• Information and Declarations

• Completed Proposal Form with subsidiary details and pending legal cases/claims

• Timely notification of any claims or circumstances that may lead to claims

• Timely notifications of any material changes in the organisation

Important Aspects while buying/reviewing D&O Policies

Raheja QBE General Insurance Company Ltd.

• India’s 21st General Insurance Company

• A Joint Venture between the Rajan Raheja Group and QBE Insurance

Group of Australia

• Strong board with 50:50 representation from the two partners

• Paid-up capital of INR 2 billion

• Headquartered in Mumbai, Offices at Hyderabad, Chennai, Bangalore,

New Delhi, Ahmedabad and Pune

• Business model: Focus on specialty products, Corporate – Commercial –

Broker

QBE Insurance Group

• Australia’s largest international general insurance and reinsurance group

• Operates out of 43 countries with over 17,000 staff worldwide

• Annual GWP of $18.4 billion

• Standard and Poor’s Rating of A+

• Combined Operating Ratio (COR) of 97.1% despite record catastrophe

claims

• One of the largest underwriters at Lloyd’s

• Over 135 acquisitions over the last 25 years

Group Companies• Prism Cement Ltd.

• H&R Johnson (India) Ltd. (merged with Prism)

• RMC Readymix (India) Pvt. Ltd. (merged with Prism)

• Exide Industries Ltd.

• Hathway Cable & Datacom Ltd.

• Asianet Satellite Communications Ltd.

• R Raheja Properties

• Outlook Group

• Globus

Rajan Raheja Group

Joint Ventures• Raheja QBE General Insurance Co. Ltd.

• Exide Life Insurance Co. Pvt. Ltd.

• ING Mutual Fund

• Sonata Software Ltd.

• Supreme Petrochem Ltd.

• Rajvilas & Trident Hilton

• J. W. Marriott

• Health & Glow

Thank YouRaheja QBE General Insurance Co. Ltd5th Floor, Windsor HouseCST Road, KalinaSantacruz (East), Mumbai 400098 - IndiaTelephone: 022-42313888Toll Free: 1-800-102- (RQBE) 7723www.rahejaqbe.com

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directors & officers management liability insurance phd chamber, new delhi farzan p. khansaheb...

Documents

directors slide

duties of directors

directors probability

company history

insurance policy

liability exposures

sour slide

future director