liability mfs-302 project draft

8/3/2019 Liability MFS-302 Project Draft

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MF

MFS-302

2011

DIRECTORS AND

OFFICERS LIABILITYINSURANCE

EXTENSIONS AVAILABLE AND NEEDED

NIRJHAR DUTTA

FS10-023

N A L S A R - I I R M


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INDEX

1. ROAD MAP AND DRAFT2. INTRODUCTION3. DIRECTORSS AND OFFICERS LIABILITY INSURANCE4. DIRECTORS5. LEGAL AND ECONOMIC PRINCIPLE6. BASIC COVERAGES7. EXTENSIONS AVAILABLE AND NEEDED8. CONCLUSION9. BIBLIOGRAPHY


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ROAD MAP AND DRAFT

SCOPE OF COVER AVAILABLE AND TYPES OF COVER AVAILABLE

(Basic Study)

The Scope of cover available is always clearly understood when first there is clarity on the

target group whom to the Insurance cover serves. Who this Indemnity can be issued to is:

Directors & Officers of the Company Former, Present and Future Directors of the Company Employees working in a Managerial and supervisory capacity Directors and Offices of the Holding Company Directors and Officers of the Parent Company; Existing Subsidiaries and Representation in Associate Companies.

What are the components that need cover?

Directors and Officers Legal Liability Company Reimbursement Defence costs

A basic idea of the scope of cover available would be from a peripheral study of the

following Agreements:

Agreement A-Direct Cover to Directors Agreement B-Corporate Reimbursement to Directors & Officers Agreement C-Coverage for Entity Securities Agreement D-Cover for Employment Practices Liability

A bit deeper understanding would make us understand that A would provide Coverage

directly to Directors and Officers for Loss and Defence Expenses from wrongful actions or

decisions-


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Applies where Corporation does not indemnify its Directors and Officers

B would effectively mean Corporate Reimbursement this is why Companies go in for a B

Agreement. In this Agreement Reimbursement is available to the Extent permissible.

(Various parameters)

C is an Agreement that has achieved high Market focus as also to serve as a tool for Effective

Corporate Governance. This would provide for the Losses to Investors due to violation of

Security Laws, SEBI Laws and for Non compliance of Clause 49 and similar statutory

controls.

D is an Agreement which provides cover for Employment Practices Liability-this agreement

has also achieved great importance and focus in recent times it provides against various

kinds of Employment Practices violation (as viewed by the Employee and the Legal forum).

The project will start from a brief description about what is D&O insurance and shall move

onto to the basic types of policies available, the legal and economic principles upon which

D&O insurance is based, the basic coverages and the extensions available and are needed to

provide wholesome protection to the insured.


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CHAPTER 1: INTRODUCTION

Risk management is an important component of corporate governance practices and efficient

management of the risk that key persons in a company are exposed to is therefore vital for

every company. Insurance is the best tool for risk management. The recent years have seen a

lot of developments in the insurance market in terms of products and services.

Directors and Officers (D&O) liability insurance is one such product which has now

become an important part of management liability insurance. Globally, in most of the

countries in Europe and America, majority of the large corporations maintain D&O liability

insurance today. In general, the D&O liability insurance claims are more from larger

companies, whether listed or unlisted, but for that matter it is erroneous to conclude that

private or smaller companies and their directors are immune to such an insurance product.

Even in the latter type of companies litigation possibilities are not completely ruled out and

there are numerous instances of litigation between members of the family or once-upon-a

time friends who mutually agreed to start a company. These apart, companies, big or small,

listed or not always stand open to the risk of litigations from creditors, customers, employees,

banks, vendors, competitors and other public institutions.

This project mainly deals with the coverage that a D&O policy offer and also the extensions.

Thus the main aim of the project at its natural conclusion should be to give a panoramic

understanding of the nature of D&O insurance, its importance in the Indian Business context

especially with the recent liberalization of the Indian economy and the coverage it provides

and the advantage to the corporates for availing such a policy and extensions which are

currently available in the market and the extensions or coverage which may be needed.


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CHAPTER 2:

DIRECTORS AND OFFICERS LIABILITY INSURANCE

Directors and Officers Liability Insurance, often referred to as just D&O Insurance, is

one type of liability insurance whose beneficiaries are the directors and key officers of a

company or the company itself. The payment of this liability insurance is made in order to

cover various costs of a lawsuit like damages, defence costs, lawyers fees, consequent losses

etc. resulting from the wrongful acts and deeds of directors and officers of a company in their

capacity as such. Such wrongful acts might be omissions, errors, misstatements, misleading

statements, neglect or breach of duty by such directors or officers. Suits can be brought for

various reasons by various stakeholders like the shareholders for insider trading, or

shareholder derivative suits, by the creditors for misrepresentation of financial health of the

company, by competitors for unfair trade practices, by consumers for defect or deficiency of

product and services and by public organizations for various issues like pollution and other

health hazards. Lawsuits covered may range from both civil and criminal suits to regulatory

investigations and trials.

The Directors of a company are bound by their fiduciary duty towards the company and the

shareholders. There is a principal & agent relation between the shareholders and the directors,

and the directors, as agents are bound to act in the best interest of the shareholders. In this age

of corporate governance, the scope of directors duties have been enhanced so much so that in

most cases the term shareholder is replaced by the term stakeholders and it is believed that

the directors are bound by their duty of care not only to shareholders but also to creditors,

employees, suppliers, customers and so on. They can therefore be liable for breach of

contract or breach of duty, non-disclosure of interest, negligence, mismanagement of assets

etc. to all stakeholders. This substantially enhances their risk. In countries like the United

States, corporate law makes it mandatory for companies to indemnify their directors and key

officers against risk of personal liability arising by virtue of their position in the company.

The idea behind is to encourage qualified and capable people to take up these important

positions in the companies and for the companies to be able to retain them. However, there

are numerous situations in which the companies are not allowed to indemnify its directors or

officers in which cases the D&O insurance comes in handy.

Following is a brief note on the possible ways to relieve directors from liability:

Ratification by shareholders: Certain breach of duty by directors can be ratified by anhonest disclosure of the same in a shareholders meeting and the latter deciding to

ratify the directors by passing the required resolution.


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Indemnification by company: While the company cannot enter into contract withdirectors to exempt them from any liability arising out of negligence, fraud etc.

towards company, the company can definitely indemnify directors against liability

arising out of their dealings on behalf of the company with third parties.

Business Judgement Rule: Next comes the business judgment rule which the courtsmight apply when a suit is brought against the directors and none of the above is

applicable. This is the essence of section 6331

of the Companies Act, 1956.

D&O liability insurance: When all the above fails then comes the D&O insurancecover for protecting directors.

Directors and Officers Liability insurance is commonly purchased with a companion product"Corporate Reimbursement Insurance" (or "Company Reimbursement Insurance"). When

purchased together, a single insurance policy is normally issued which is entitled "Directors

and Officers Liability and Company Reimbursement Insurance". Modern Directors &

Officers policies now frequently include cover for the Company Entity itself as well as

Employment Practice Liability.

D&O insurance is usually purchased by the company itself, even when it is for the sole

benefit of directors and officers. Reasons for doing so are many, but commonly would assist

a company in attracting and retaining directors. Where a country's legislation prevents the

company from purchasing the insurance, a premium split between the directors and the

company is often done, so as to demonstrate that the directors have paid a portion of the

premium.

1 633. Power of Court to grant relief in certain cases .(1) If in any proceeding for negligence, default,

breach of duty, misfeasance or breach of trust against an officer of a company, it appears to the Court hearingthe case that he is or may be liable in respect of the negligence, default, breach of duty, misfeasance or breach of

trust, but that he has acted honestly and reasonably, and that having regard to all the circumstances of the case,

including those connected with his appointment, he ought fairly to be excused, the Court may relieve him, either

wholly or partly, from his liability on such terms as it may think fit:

1[Provided that in a criminal proceeding under this sub-section, the Court shall have no power to grant relief

from any civil liability which may attach to an officer in respect of such negligence, default, breach of duty,

misfeasance or breach of trust.]

2[(2) Where any such officer has reason to apprehend that any proceeding will or might be brought against him

in respect of any negligence, default, breach of duty, misfeasance or breach of trust, he may apply to the High

Court for relief and the High Court on such application shall have the same power to relieve him as it would

have had if it had been a Court before which a proceeding against that officer for negligence, default, breach of

duty, misfeasance or breach of trust had been brought under sub-section (1).

(3) No Court shall grant any relief to any officer under sub-section (1) or sub-section (2) unless it has, by noticeserved in the manner specified by it, required the Registrar and such other person, if any, as it thinks necessary,

to show cause why such relief should not be granted.]


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A common misperception of D&O insurance is that it makes directors or officers able to

engage in acts they know to be wrong; this is not the case. Intentional acts are not covered in

D&O insurance. Only negligence by directors or officers would be covered.

In a recent spate of litigation, a number of adverse court verdicts regarding the liability of

directors and officers of companies to a third party were passed where the directors and

officers were held personally liable for payment of compensation to the third party.

Ordinarily, the directors and officers are bound by duty towards the company itself,

shareholders, employees, creditors, customers, competitors, members of the public,

government and other regulatory bodies. Any breach or non-performance in the duties can

result in claims against the companies and/or its directors of the company by reason of any

wrongful act in their respective capacity. The Directors' and Officers' Liability Insurance

policy has been designed specifically to meet any financial liabilities imposed upon them.

This policy is necessary for directors and officers of every company if they wish to avoid

potential litigation owing to-

Failure of supervision. Inaccuracy in statements of financial accounts.

Lack of judgement and good faith. Mismanagement of funds. Mis-statements in prospectuses. Allotment of shares. Unauthorised loans or investments. Failure to obtain competitive bids. Imprudent expansion resulting in a loss. Using inside information. Unwarranted dividend payment, salaries or compensation. Misleading statements filed with the stock exchange. Misrepresentation in acquisition agreement for the purchase of another company. Wrongful dismissal of an employee.


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THE MAIN EXPOSURES:

Publicly Quoted Companies Subsidiaries with Outside Shareholders

Joint Ventures Raising Additional Capital Mergers & Acquisitions Major Restructuring International Markets Private & Public Offerings Independent Directors on Board Opening branches/subsidiaries overseas, particularly in the USA


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CHAPTER 2: DIRECTORS (WHO ARE COVERED?)

MEANING OF DIRECTOR AS PER THE COMPANIES ACT, 1956:

A company is a legal entity and does not have any physical existence. It can act only through

natural persons to run its affairs. The person, acting on its behalf, is called Director.

Section 2(13) of the Companies Act, 1956, defines a Director as any person, occupying the

position of Director, by whatever name called. They are professional men, hired by the

company to direct its affairs. But, they are not the servants of the company. They are rather

the officers of the company.

The definition of Director given in this clause is an inclusive definition. It includes any

person who occupies the position of a director is known as Director whether or not

designated as Director. It is not the name by which a person is called but the position he

occupies and the functions and duties which he discharges that determine whether in fact he

is a Director or not. The function is everything; name matters nothing. So long as a person is

duly, appointed by the company to control the companys business and, authorized by the

Articles to contract in the companys name and, on its behalf, he functions as a Director.

The Articles of a company may, therefore, designate its Directors as governors, members of

the governing council or, the board of management, or give them any other title, but so far as

the law is concerned, they are simple Directors.

Meaning of Liability:

The word liability has two general connotations. In business law, liability refers to the

responsibility for a company's debt or other obligations. Some forms of businessorganization, such as a sole proprietorship, have unlimited liability, meaning that the owner is

personally responsible for the debts and obligations of the business, and lenders or courts

may look to the owner's personal assets for payment of these obligations.

Limited liability organizations, such as corporations, allow lenders and courts to only seize

the assets of the business rather than the assets of the owners.

However, liability is more frequently used in an accounting sense, where the word refers to a


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claim on a company's assets. Technically, a liability is a required transfer of assets or services

that must occur on or by a specified date as a result of some other event that has already

occurred.

Why liability matters?

Information about a company's liabilities is a key component of accurate financial reporting

and a crucial part of thorough financial analysis. Although the Financial Accounting

Standards Board, the Securities and Exchange Commission, and other regulatory bodies

define how and when a company's liabilities are reported, and although liabilities make up a

significant portion of the balance sheet, not all liabilities are required to appear on the balance

sheet. Therefore, analysts must also carefully study the notes to a company's financialstatements.

Excessive liabilities can ruin a company, but they are not always detrimental. Liabilities often

represent the company's ability to defer cash outlays, allowing it to use that cash for other,

possibly more profitable purposes until the obligation is due. The use of debt financing can

magnify profits that would have otherwise gone unrealized.

Liability of directors under the Companies Act, 1956

Position of director:

The directors are the custodian of the interests of the shareholders. Their position is fiduciary

vis--vis the Company. The directors must exercise their power for the benefit of the

Company. There exists a relationship of a trustee and trust between the directors and the

shareholders of the Company. The directors have been held trustees of the assets of the

Company and in many cases the courts have directed them to reimburse the loss to the

Company, where it was found that directors have applied the Company's money in payment

of an improper commission. Each section also specifies the penalty to be paid in case of

default, imprisonment or both.

The strictness with which the courts view the responsibility and the sacredness of the trust

reposed in the directors had been emphasized in many cases. Their position has further


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changed in the era of Corporate Governance to the extent that the directors have to protect the

interests of not only the shareholders but also other stakeholders.

In this article an attempt is made to define the extent and scope of liabilities of Directors viz.

Managing Director, Working Director and an ordinary Director under the Companies Act,

1956.

Liabilities of Directors:

The liabilities of the directors vary according to the status of the Company i.e. whether the

Company is private or public. But in all cases in discharging the duties of his position, he

must act honestly, carefully and without any negligence. The various liabilities of directors

under the companies Act, 1956 may be summarized as under:

1. Filing of various documents with Registrar of Companies:

a) Annual Return within 60 days of the annual general meeting.

b) Balance Sheet within 30 days of laying the accounts at the annual general meeting.

c) Return of Allotment of Shares in Form No. 2 within 30 days of Allotment of shares.

d) Change in Directors / Secretary (Appointment / Re-appointment /Cessation/ Resignation

etc.) in Form No. 32 within 30 days of such change.

e) Registration of certain resolutions and agreements u/s 192 in Form No. 23 within 30 days

of passing of such resolutions etc.

f) Creation & modification of charges in Form No. 8 & 13 and Satisfaction of charges inForm No. 17 & 13, within 30 days of creation, modification and satisfaction respectively.

2. Holding of various Meetings under Companies Act, 1956:

a) Board Meeting:

b) Annual General Meeting

c) Extra-ordinary General Meeting


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3. Maintenance of Statutory Books under Companies Act, 1956:

a) Minutes Book: for Board meeting and General meetings separately u/s 193.

b) Register of Members: showing name, address and occupation of each member, the share

held including the distinctive numbers, the amount paid on the shares etc.u/s 150/151

c) Register of interested Directors etc. : showing the required particulars u/s 301

d) Register of Directors, Managing Directors and Secretary: showing the required

particulars about them etc. u/s 303

e) Register of Directors, Managing Directors and Secretary Shareholding: showing therequired details about shareholding etc. u/s 307.

f) Register of Charges: showing the particulars of charges on the assets of the company u/s

143.

g) Register of Investments showing particulars of investment u/s 49/ 372A.

h) Register of Transfer of Shares: along with details relating to the transferor and the

transferee and the No. of shares transfer etc.

4. Liability for negligence

5. Standard and degree of care and skill

6. Special Statutory Protection against Liability [S.633]

7. Fiduciary Duties


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CHAPTER 3: LEGAL AND ECONOMIC PRINCIPLE BEHIND DIRECTORS AND

OFFICERS LIABILITY INSURANCE POLICIES

3.1. LEGAL PRINCIPLE BEHIND D&O INSURANCE

D&O liability insurance policies promote the concept of Business Judgment Rule2

which

states that law presumes that directors ofcompanies have bona fide regard for the interest of

stakeholders of a company in running the management of the company and in taking

important decisions. Under this rule, in plain language,it is to be presumed that in taking any

decision about the companymanagement, the directors pay utmost regard to the interest ofall

the stakeholders. The intent of legislation is to encouragejust and well informed decisions by

the company managementwithout fear of personal liability and thereby to help the business

to progress and to ensure that the shareholders wealth is multiplied. D&O insurance is just

another assurance of putting into practice the business judgment rule and protecting the

directors who work in the best interest of the company. In running a business, if a gap is

created due to lack of express legal provisions, D&O insurance would fill the gap. The

ultimateobjective is to have the best business decisions.

2A legal principle that makes officers, directors, managers, and other agents of a corporation immune from

liability to the corporation for loss incurred in corporate transactions that are within their authority and power

to make when sufficient evidence demonstrates that the transactions were made in Good Faith.

The directors and officers of a corporation are responsible for managing and directing the business and affairs of

the corporation. They often face difficult questions concerning whether to acquire other businesses, sell assets,

expand into other areas of business, or issue stocks and dividends. They may also face potential hostile

takeovers by other businesses. To help directors and officers meet these challenges without fear of liability,courts have given substantial deference to the decisions the directors and officers must make. Under the business

judgment rule, the officers and directors of a corporation are immune from liability to the corporation for lossesincurred in corporate transactions within their authority, so long as the transactions are made in good faith and

with reasonable skill and prudence.

The rule originated in Otis & Co. v. Pennsylvania R. Co., 61 F. Supp. 905 (D.C. Pa. 1945). In Otis, ashareholder's derivative action alleged that corporate directors failed to obtain the best price available in the sale

of Securities by dealing with only one investment house and by generally neglecting to "shop around" for the

best possible price, resulting in a loss of nearly half a million dollars. The federal district court ruled that

although the directors chose the wrong course of action, they acted in good faith and therefore were not liable to

the shareholders. The court reasoned that "mistakes or errors in the exercise of honest business judgment do not

subject the officers and directors to liability for Negligence in the discharge of their appointed duties."


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3.2.THE ECONOMIC PRINCIPLE BEHIND D&O INSURANCE

The basic principle that governs the D&O insurance regime is the economic concept of risk

aversion and its effects. Risk aversion implies the unwillingness of a person to accept a

proposition which has an uncertain result and instead opt for another proposition that

guarantees a certain result even if it be lower than the highest expected result in the first case.

This concept of economics would apply to a highly knowledgeable individual who might be

unwilling to take up the position of a director simply because he is afraid of ending up with

personal liability. D&O insurance provides a shield in these cases. Such insurance can make a

director or an officer risk-neutral if not risk-loving, both of which will benefit the company

ultimately. By being risk neutral they can take important decisions for the company based

upon all necessary information available at hand at the time of taking decision and in this

manner they can give their 100% to the company. In addition to the above, purchase of a

D&O insurance policy by a company will also give it the signalling strength by which it can

claim to be a good employer in the job market. It can have an edge over its competitors. A

liability arising from their position in the company might not only cause financial losses to

directors and officers, but at the same time their personal goodwill might also get tarnished.

There is no denying the fact that they have a large specific investment involved. So, with the

right D&O coverage in place, a company will be able to attract the most efficient and able

candidates on board and key positions. In the long run, the shareholders will be benefitted in

the form of getting better returns and the society at large will also be better off in the sense

that there will be increased productivity and increased job security. For companies, therefore,

it is a cost benefit analysis. The better you pay for insurance, the more qualified people you

get.


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CHAPTER 5: BASIC COVERAGES

At its most basic, D&O insurance protects directors and officers from liability arising from

actions connected to their corporate positions. Due to general expansion in the industry,

market pressures and the industry's responses to the development of case law, D&O

insurance has expanded beyond its original and basic coverage. Thus, a single policy now

may provide multiple and varied options by standard form or endorsement. The individual

coverages discussed below typically are subject to distinct terms, conditions and deductibles,

and even may be subject to distinct policy limits or sub-limits. However, some common

threads run through each coverage offered in a D&O policy. For example, D&O insuring

agreements generally specify that coverage is limited to claims first made during the policy

period. In addition, the insurer typically does not have a duty to defend but is required to

cover the costs of the insured's defence.

Insuring Agreement [A] (D&O): (SIDE A)Although each policy will employ its own language, Insuring Agreement A, often referred to

as "A-Side Coverage," typically provides coverage directly to the directors and officers for

loss - including defence costs - resulting from claims made against them for their wrongful

acts. A-Side Coverage applies where the corporation does not indemnify its directors and

officers. A corporation may not indemnify its directors or officers because it either (1) isprohibited by law from doing so, (2) is permitted to do so by law and the company's bylaws

but chooses not to do so, or (3) is financially incapable of doing so, due to bankruptcy,

liquidation, or lack of funds. The laws regarding indemnification differ from jurisdiction to

jurisdiction. Insuring Agreement A additionally may specify that coverage is limited to those

claims connected to an insured's capacity as an insured director or officer of the company.

This issue of capacity recurs throughout D&O coverage analysis. The limiting language may

appear in the insuring clause, in the definitions of "wrongful act" or "insured" found

elsewhere in the policy, or in all three clauses. Although a claim sometimes implicates an

insured in a single and clear capacity, a claim may well arise out of an individual's multiple

capacities. For example, an individual may be sued as a director and a shareholder of a

company (perhaps as a purchaser or seller of company stock), or an officer of a homeowner's

association may also be a homeowner and it may not be clear whether his or her actions were

taken as one or the other - or both. Similarly, a corporations' lawyer may also sit on the board

of directors.


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Insuring Agreement [B] (Corporate Reimbursement): (SIDE B)A typical Insuring Agreement B, or "B-side coverage," reimburses a corporation for its loss

where the corporation indemnifies its directors and officers for claims against them. B-side

coverage does not provide coverage for the corporation for its own liability. The language

and conditions of Insuring Clause B typically mirror Insuring Clause A.

Entity Securities Coverage:Many D&O policies offer an optional coverage to protect the corporation against securities

claims. Such coverage provides protection for the corporation for its own liability. Many

policies today provide such coverage to the corporation whether or not its directors and

officers are also sued; other policies, however, provide such coverage only where the

corporation is a co-defendant with its directors and officers. Entity coverage may be part of

the policy form as "Insuring Agreement C" or may be added as an endorsement. The addition

of entity coverage for securities claims is a relatively new development, and addresses

concerns and confusion raised by court rulings regarding allocation.

Employment Practices Liability Coverage:Employment Practices Liability ("EPL") coverage also has become a common addition to

corporate coverage - often by endorsement to the D&O policy or as a stand-alone policy

issued to the company. This coverage typically protects directors, officers, employees and/or

the company against employment-related claims brought by employees and, in certain

circumstances, specified third-parties. For example, it provides coverage for wrongful

dismissals or failures to promote, sexual harassment, and other violations of federal, state or

local employment and discrimination laws brought by the company's employees. EPL claims

have also seen a dramatic increase in frequency and severity over the past decade.


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CHAPTER 6: EXTENSIONS AVAILABLE AND NEEDED

The extensions are subject to the insuring clauses and all other terms and conditions of the

policy.

Advance payment of defence costsWhere the insurer have not decided whether an insured is entitled to the cover set out in this

policy, they will still advance defence costs on behalf of that insured within 30 days of being

invoiced for them by defence counsel. Defence costs advanced on behalf of an insured who is

not entitled to the cover set out in this policy must be repaid to the insurer.

Emergency costs coverageThe insurer agrees to pay up to 10% (ten percent) of the indemnity limit in defence costs

incurred in an emergency without our prior written agreement, provided the insurer are then

asked to give their written agreement within 30 days of those defence costs first being

incurred.

Investigation costsThe insurer agrees that defence costs shall include investigation costs. the total amount we

agree to pay under this extension for all investigation costs payable on behalf of all insureds

shall not exceed the amount stated in item 4 of the schedule to this policy.

Public relations expensesThe insurer agrees that defence costs shall include public relations expenses. the total amount

we agree to pay under this extension for all public relations expenses payable on behalf of all

insureds shall not exceed the limit expressly stated.

Extradition costsThe insurer agrees that defence costs shall include extradition costs.

Bail bond and civil bond expensesThe insurer agrees that defence costs shall include bail bond and civil bond expenses. The

total amount we agree to pay under this extension 2.6 for all bail bond and civil bond

expenses payable on behalf of all insureds shall not exceed 10% (ten percent) of the

indemnity limit.

pollution defence costsWhere a claim made against an insured person arises from a wrongful act or employment

practice breach actually or allegedly committed in connection with the discharge, dispersal,

release or escape of pollutants, the insurer agrees that exclusion (pollution) shall not apply to:

(a) Defence costs; or


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(b) Loss, but only where the claim is a derivative action brought in the name of an insured

entity by someone who is not an insured person. The total amount we agree to pay under part

(a) of this extension for all defence costs payable on behalf of all insureds shall not exceed

the limit provided.

Occupational health and safety defence costsWhere a claim made against an insured person arises from an actual or alleged breach of any

occupational or workplace health and safety legislation, the insurers agree that the bodily

injury/property damage exclusion from radioactivity and nuclear risk shall not apply to

defence costs.

Outside directorship coversThe insurer agree to pay on behalf of each outside director, loss which results from a claim

first made against them and reported to us during the insurance period alleging a wrongful

act. Cover under this extension is excess of any other insurance or indemnity available to the

outside director. If any other insurance available to the outside director is provided by the

insurer, the indemnity limit shall be reduced by the indemnity limit stated in the schedule of

that other insurance.

Additional excess limit for insured personsWhere conditions (a) to (b) of this extension have been satisfied, the insurers agree to pay on

behalf of each insured person, loss which an insured entity is not permitted or required to pay

them by way of indemnity and which results from a claim first made against that insured

person and reported to us during the insurance period. The conditions referred to above are as

follows:

(a) The indemnity limit has been exhausted; and

(b) Any other available insurance or source of indemnity available to an insured person has

been exhausted. The total amount, in addition to the indemnity limit, we agree to pay under

this extension for all claims for all insured persons shall not exceed 10% (ten percent) of the

indemnity limit in the aggregate.

New subsidiary coverWhere conditions (a) to (d) of this extension are satisfied, we agree that the definition of

insured entity shall include a subsidiary created or acquired during the insurance period, but

only in relation to a wrongful act or employment practice breach actually or allegedly

committed after the date that subsidiary was created or acquired. The conditions referred to

above are that a subsidiary:


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(a) Has total gross assets outside of the United States of America or Canada or their territories

or possessions which are less than 25% (twenty five percent) of the total gross assets of the

insured entity;

(b) Has total gross assets within the United States of America or Canada or their territories or

possessions which are less than 25% (twenty five percent) of the total gross assets of the

insured entity;

(c) Is incorporated outside of the United States of America or Canada or their territories or

possessions; and

(d) Does not undertake activities which attract one or more of the provisions of the securities

act of 1933 (usa), the securities exchange act of 1934 (usa), any rules or regulations of the

securities and exchange commission (usa), or any federal, country, state, or territory rules or

regulations or local or provisional statute in the united states of America or any of its

territories or possessions relating to securities, or the equivalent in Canada and any of its

territories or possessions. If any of the conditions listed above cannot be satisfied then our

prior written agreement by way of endorsement to this policy will be required before the

cover available under this extension will apply.

Former subsidiary coverThe insurer agrees to extend the cover available under this policy to any entity that ceases to

be a subsidiary either before or during the insurance period, but only in relation to a wrongful

act or employment practice breach actually or allegedly committed whilst the entity was a

subsidiary.

Heirs, estates and legal representativesThe insurer agrees to extend the cover available under this policy to the estate, heirs, legal

representatives or assigns of any deceased or mentally incompetent insured person, but only

in relation to a wrongful act or employment practice breach actually or allegedly committed

by such insured person.

Bi-lateral discovery periodWhere the insurance period has ended and this policy has not been renewed, replaced with

similar cover or cancelled, the insured may give us written notice within one of the applicable

discovery periods set out in this extension, of any claim first made against the insured before

or during the discovery period alleging the occurrence of a wrongful act or employment

practice breach prior to the end of the insurance period. The insured is entitled to a discovery

period of:


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(a) 90 days, granted automatically with no additional premium payable; or

(b) 12 months, if the insured asks for such period in writing within 15 days of the end of the

insurance period and pays, within a further 15 days, a further premium of 50% (fifty percent)

of the annual premium we charged for the insurance period; or

(c) 72 months, if a transaction takes place and the insured asks for such period in writing

within 30 days of the end of the insurance period and accepts any terms and conditions,

including an additional premium, we may reasonably impose. Any discovery period

purchased under this extension cannot be cancelled and any additional premium paid for the

discovery period is not refundable.

Retired directors and officersThe insurers agree to extend the cover available under this policy to any insured person who

retires before:

(a) A transaction; or

(b) The insolvency, liquidation, receivership, bankruptcy or administration of the insured; or

(c) The end of the insurance period but only in relation to a claim first made against them

within 84 months of the end of the insurance period which alleges they committed a wrongful

act or employment practice breach before they retired. The cover this extension provides will

be automatically withdrawn if:

(i) This policy is renewed, cancelled or replaced with similar cover; or

(ii) A discovery period is purchased by the insured under extension (bi-lateral discovery

period).

Crisis containmentThe insurers shall reimburse the company for the crisis loss which the company incurs by

reason of a crisis event which first occurs and is notified to us during the insurance period.

The total amount the insurers agree to pay under this extension for all crisis loss payable on

behalf of all insured shall not exceed to the amount mentioned in the policy and is part of,

and not in addition to the indemnity limit.

Tax extensionThe insurers agree to extend cover to include an insured persons loss arising from their

personal liability for unpaid taxes where the company has become insolvent except to the

extent that such liability arises from the wilful intent of the insured person to breach any

statutory duty governing the payment of taxes. The total amount we agree to pay under this


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extension shall not exceed the limit prescribed expressly and is part of, and not in addition to,

the indemnity limit

Continuous coverWhere the insured:

(a) First knew, or ought reasonably to have known, on or after the continuity date of any

claim or circumstance that could give rise to a claim; and

(b) Did not give notice of that claim or circumstance under any previous insurance providing

directors and officers' liability cover on or after the continuity date as shown on the

schedule; and

(c) Gives notice of that claim or circumstance to us during the insurance period we agree not

to apply exclusion (a) or (c), provided that:

(i) The insured's failure to give earlier notice of such claim or circumstance to the insurer

cannot, in their view, be explained by fraud; and

(ii) The insurers may, in their absolute discretion, apply to such claim or circumstance, any of

the terms and conditions of the insurance providing directors and officers liability cover in

existence when the insured first knew, or ought reasonably to have known, of it, or the terms

and conditions of this policy; and

(iii) The insured has maintained, without interruption, a directors and officers liability

insurance policy issued by us and we were the directors and officers liability insurer when the

insured first became aware of such claim or circumstance for the purposes of this extension,

continuity date means the date stated in the schedule.

Prosecution costsThe insurers agree that defence costs shall include the prosecution costs the total amount we

agree to pay under this extension for all claims for all insured persons shall not exceed 10%

(ten percent) of the indemnity limit in the aggregate, and is part of an not in addition to the

indemnity limit.

Deprivation of assets extensionThe insurers agree that defence costs shall include deprivation of assets expenses the total

amount we agree to pay under this extension for all claims for all insured persons shall not

exceed the limit prescribed in the aggregate, and is part of and not in addition to the

indemnity limit.


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Fines and penalties extensionThe insurers agree that the definition of loss is extended to include any civil fines and civil

penalties awarded against an insured person imposed by law, provided that we are not legally

prohibited from paying the civil fines and/or civil penalties under the law applicable to this

policy. The total amount we agree to pay under this extension for all claims for all insured

persons shall not exceed 10% (ten percent) of the indemnity limit in the aggregate, and is part

of an not in addition to the indemnity limit.


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CONCLUSION:

The business of liability insurance is just in its infancy in India, in fact given the size of the

Insurance market in general in India and the given penetration figures given by the IRDA,

this makes u wonder so much is left to do in the insurance market, and this is an exciting

phase in the given point of time. The entry of foreign insurers and the proverbial struggle

between the old guard and the new guard makes for a exciting time to be in the market right

now.

The project allocated to me, was bout the extensions that are available and that are needed in

directors and officers liability insurance policies. In fact when making the project I came to

understand the acute responsibility a director faces, the liability is not only emanates from thecommon law but also from around 450 statutes that enforces mandatory duty upon a director.

But given the booming economic situation in our country and the current pace of economic

development that are currently going around in all parts of the country, the number of

companies that are being incorporated and the number of companies that currently going for

listing is simply amazing, this an phase of growth a consolidation of growth and

consolidation for the corporate houses operating in India.

This also gives rise to liability to the directors jointly and severally for actions taken by them

in the course of their employment. Thus this project talked about the current protection

available to them in the Indian context and what covers and extensions should be extended by

the insurers towards providing better coverage towards the directors.

In comparing the covers available in India and in foreign I realized the Indian insurers have

followed the western concepts but there isnt any singular that stands out. That is there is a

lack of product innovation and the market being as large as it is, there should some market

research and product innovation for the directors. According to the latest numbers released by

FICCI, there are almost 83,000 SME and corporate houses operating in India. This gives a

fairly good idea how big is the market and from this point this only going to get bigger.

Thus to conclude it is the opinion of the researcher the covers and extensions available

though adequate in the current market scenario would become woefully ineffective in the

very near future, so the insurers are advised to innovate the basic coverages available.


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BIBLIOGRAPHY:

liability mfs-302 project draft

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