d&o liability insurance
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D&O Liability Protection of Personal Assets
Ram Garg CFA, MBAPractice Leader – Financial & Casualty LineJ B Boda Singapore
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Disclaimer
The information provided should not be relied on as legal advice or a definitivestatement of the law in any jurisdiction. For such advice, an applicant, insured,listener or reader should consult their own legal counsel.
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Directors’ Duties and Legal Framework
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D&O Insurance
“A study sponsored by McKinsey shows that 36% of corporate directors polled
actually admitted that they did not fully understand the risks faced by their
company…others may have had their doubts but did not like to say so”
Economist, Jan 24, 2004
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Legal liabilities of Directors & Officers
Directors of a company have several duties and liabilities imposed on them under various provisions of the law
Duties can be found under common law and statutes. Statutes such as the Companies Act impose on directors the duty to act with care and skill
If directors are held to be personally liable, they would have to defend and pay the damages on their own
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Legal liabilities of Directors & Officers
Regulators in Asia are more active and focusing on;
– Transparency and disclosure– Financial reporting– Board practice
All above factors deriving greater expectationof best corporate governance practice
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Directors’ & Officers’ Liability Insurance
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What is D&O Insurance?
D&O Insurance provides indemnity for theIndividual Directors and Officers of acompany against their legal liability to paydamages to third party claimants as aconsequence of the third party havingsuffered financial loss through thenegligent act, error or omission of theDirector or Officer in his/her “managerialcapacity”.
In other words, it is a “ManagerialNegligence” cover
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D&O Insurance – Insured Persons
– All Past, Present and Future Directors and Officers (Ds&Os) of the Insured Organisation; and Its Subsidiaries
– In relation to Employment Practices Liability claims, all employees
– Spouses and legal representatives of Ds&Os for Wrongful Acts committed by said Ds&Os
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D&O Insurance - Structure
Claim or allegation made against Directors or Officers (D&O’s)
Claim or allegation notified to Underwriters
Q: Can and will the Company indemnify the D&O’s?
Insurers advance Costs andExpenses to the D&O’s under the
D&O Section of the PolicyThe Company advances Costs and
Expenses to the D&O’s
The Company recovers their outlay underthe Company Reimbursement Section
EXCESS OF THE DEDUCTIBLE
Liability of the D&O’s is finally determined through thecourts or settlement negotiations involving D&O’s,
The Company and Underwriters
Q: Is the Company legally able to indemnify theD&O’s for their liability?
Insurers indemnify the D&O’s underthe D&O Section of the Policy
Insurers indemnify the Company under the Company Reimbursement
Section EXCESS OF THE DEDUCTIBLE
No Yes
No Yes
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Claim Scenarios
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Claimant Ranking
1.Third party (30-50%)
2.Regulatory/Gov Body (10-30%)
3.Employees (20-30%)
4.Miscellaneous (10-20%)
5.Shareholder (Below 10%)
Source: various figures from different D&O insurers within Asia region
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Common types of claims
a) Shareholders: mismanagement, decline in investments, performance of the company, misrepresentation in offering documents, bad investment decisions
b) Employees: employment practices claims such as discrimination, harassment, libel and slander, improper working conditions
c) Investors: misrepresentation and misleading information
d) Competitors: unfair business practice, libel and slander
e) Regulators: breach of statutory provisions, market misconduct
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D&O Claim by Regulators
1. Market Misconduct: (a) Insider trading (b) Price rigging (c) False trading (d) Market manipulation (e) Disclosure of false and misleading information
2. Directors breaches of Statutory Duties
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Real Claim Examples
DESCRIPTION OF EVENTThe Financial Regulator ('The Regulator') issued notices to attend interviews to four directors and officers of the insured minerals processing company. The Regulator was investigating disclosures regarding the effect of falling commodity prices on the company’s balance sheet.
RESOLUTIONThe D&O insurer’s dedicated claims specialist met with the directors prior to the interviews to discuss the investigation and appointment of counsel. Counsel were appointed from Insurer’s panel at discounted rates. Counsel met with the insured persons prior to the interviews and attended the interviews with them. The insured persons were able to adequately answer all concerns and the investigation ceased after the interviews.D&O Insurer paid $30,000 in Investigation Costs in excess of the deductible.
Industry Public Company
Coverage Section Directors’ & Officers’ Liability
Cause of Action Investigation
Type of Organisation Minerals Processing
Number of Employees 112
Revenue $25 million
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Real Claim Examples
DESCRIPTION OF EVENTA large publically listed company based in Philippines, held a management meeting in Hawaii and flown key executives to attend same. After meeting was over, US Federal Communication Commission initiated investigation in relation to possible violation of anti-trust law.
RESOLUTIONKey executives of the company had to defend themselves in US district court in Hawaii. The company came out clean but incurred legal cost in excess of USD 4 million during the whole episode.
Industry Public listed Company
Coverage Section Directors’ & Officers’ Liability
Cause of Action Investigation
Type of Organisation Telecom
Number of Employees More than a thousand
Revenue NA
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Real Claim Examples
Industry Private Company
Coverage Section Directors’ & Officers’ Liability
Cause of Action Breach of Child Labour Laws
Type of Organisation Retailer
Number of Employees 11
Revenue $250,000
DESCRIPTION OF EVENTThe insured owned and operated a number of newsagencies. The insured employed a number of part-time staff, which included several teenage school students. The insured was investigated and subsequently charged with various breaches of child labour laws, including a failure to obtain the consent of the teenagers’ parents to their employment.
RESOLUTIONThe insured was fined $15,000 and incurred legal costs of $18,000. The fines and costs were covered by the policy.
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Real Claim Examples
China Aviation Oil (Singapore) Corporation Ltd
China Aviation Oil, a Chinese Govt owned company listed in the Singapore Exchange suffered US$550 million in losses from speculative oil derivatives trading. The losses came to light after China Aviation Oil filed for court protection against its creditors in November 2004. CEO was arrested.
Investigation was undertaken by the Commercial Affairs Department (CAD).
In January 2005, Class Action law suit filed in the US by US investors.
.
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D&O Claims – In India
Regulatory Claims
SEBI fined Reliance Industries (RIL) in a case related to violation of Sebi’s takeoverregulations with respect to RIL’s holding in cement and engineering major L&T.D&O policy doesn’t pay fines and penalty but investigation cost related to suchclaims can be substantial and this can be covered under D&O policy.
Shareholder’s Claims
A public interest litigation was filed by a JPIL shareholder alleging violation oftakeover code by the company. The shareholder has alleged that during 1999-2000, the promoters of JPIL, Jaiprakash Gaur ' and his associates, had acquired10% of JPIL shares in 12 months without making a public offer. This is in violationof the SEBI takeover code which allows creeping acquisition only up to 5 per centduring any 12 months.
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D&O Claims – In India
Business Partner’s Claim
ICICI Bank lodged a claim under their D&O policy for INR 250 million as anoutcome of an ongoing legal battle initiated by Commerzbank. The case is relatedto funding of the Arvind Mills by ICICI Bank. Commerzbank which was also part ofthe consortium had objections to this funding. The claim filed under D&O policy forrecovery of legal expenses.
• Employment Practice Related Claim
An ex-employee of Infosys in US filed a Sexual Harassment case against the Company and its former Director . The case was settled out of Court for US$3 MN. D&O underwriters paid for the Director’s Damages and the defence costs.
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D&O Claims – In India
Ex-Director’s Claims on Subhiksha Case
Premji Invest, a private equity fund owned by Azim Premji, the billionaire chairmanof Wipro Ltd, admitted that they were taken for a ride on Subhiksha. Investmentbanking sources said the private equity firm was understood to have said it wasmisled on the true financial position of Subhiksha, which has prompted it to sendnotices to the other directors on Subhiksha’s board.
• Coca Cola Sexual Harassment Claim
Miss Universe and film star Sushmita Sen alleged that she was sexually harassed by the marketing head of Coca-Cola India. Sen made the allegation soon after Coca-Cola terminated its celebrity engagement contract with her. She alleged this was being done because she had rejected the sexual overtures of a senior Coke official. Sen’s lawyers also claimed sum of INR 14.5 million by way of compensation for sexual harassment should be paid by way of charity to an orphanage of our client’s choice. The sum has since been paid by Coke.
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D&O Insurance Issues & Key Consideration
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Role of Senior Managers
In today's volatile market conditions, adequate D&O cover for senior managers is essential
Regulators and politicians are now holding individuals accountable, so Directors are more acutely aware of their personal vulnerability
As a result, directors and other executives are more sensitive to risk than they were in the past
Executives would do well to take stock of their personal liability
D&O policy protects personal assets of individual Directors & Officers and therefore, senior managers must step in to make sure that their employer purchase effective coverage
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Key Issues to Consider
How much protection do I need?
Cover is for EACH Director : Limit for Non-Executive Director
Defense cost issues
Understand the “fraud & dishonesty” exclusion
What happens when Directors or Officers leave the company or retire?
Pricing - this is a case of balancing a number of factors.
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Key Issues to Consider
……continue
Severability in the Application (Full/partial)
Cancellation provision of policy?
Run-off cover in the event of M&A?
Insolvency issues?
Erosion of policy limit by claim under Entity section
………many more
D&O Policy is a tailor-made &
All policies are not same
