Insurance Industry Overview
Insurance Industry Overview
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Director’s and Officer’s Liability Insurance: An Overview
Director’s and Officer’s Liability Insurance: An Overview
The world is moving from acknowledged risks to the veiled or unknown, almost unimaginable, risks. Some absolutely unforeseen and unprecedented events have recently occurred leading to totally unanticipated losses. When, Lloyd’s of London introduced coverage for corporate directors and officers, in the wake of the depression of 1930, directors and officers did not perceive a great risk, and the insurance did not sell. Unlike, in recent years, directors and officers liability insurance has become a core component of corporate insurance. As many as 95% of Fortune 500 companies maintain directors and officers (“D&O”) liability insurance today.
Furthermore, it has become a commonplace of the financial world that disappointed investors will charge corporations and their officers and directors with securities fraud whenever a company’s stock drops significantly in price. In India D & O policies are modeled on the UK pattern. The covers are for the Directors and Officers and not for the company. 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. Such D&O policies are common overseas. Romania was the first country in the European Union (EU) to make D&O insurance compulsory for all corporations. There are number of risks that can be covered under the D & O policy,
These include the following:
- Indemnity to D & O for the claim and/or defence costs;
- Cover for the insured who is guilty or alleged guilty of a wrongful act such as breach of duty or trust, neglect, error misleading statement or omission
- Cover for damages, judgments, settlements, defence costs; and,
- Advances for the costs if the company has not indemnified the insurer
- Coverage of innocent directors from claims arising out of the acts of dishonest directors.
The exclusions are the following:
- Any loss resulting from fraud or dishonesty, fines, penalties, punitive or exemplary damages;
- Litigations started before the inception of the policy;
- Any claim based on circumstances notified in the previous policy.
Unlike professional indemnity, the D & O policy in addition to covering civil claims, also provides indemnity for costs incurred in criminal trials provided the insured is not found guilty. The policy is a combination of indemnity for third party liability a s well as indemnity for the defence costs. Apart from financial and corporate mismanagement lawsuits which do require insurance protection, environmental, health and safety responsibilities are also becoming increasingly stringent. In India today, companies can even take D & O policies against pollution claims, if caused by accident.
These policies already available from the general insurance companies are not very well known and are not sold on a large scale. Another reason is that many companies, corporate transparency and governance standards are still not fully met. Insurance companies therefore shy away from providing this type of cover. However now that these concepts are being promoted more aggressively by the industries themselves and their bodies, there is an increasing scope for marketing such policies. But until now, D&O liability insurance coverage
has remained low in India, largely because there have been very few claims filed against directors and officers. But ever since the Satyam scandal, the demand for D&O policies has risen as eminent people have refused to join the board of companies which have no or inadequate D&O cover.
Case Laws
- In Re National Bank of Wales, Ltd., (1899) 2 Ch 629
Directors are not liable for alt their mistakes but only for negligence which is in a business sense culpable or gross. Nor is a director liable for untrue representations made to the share-holders it he honestly believed the representations to be true and had at the time reasonable grounds for his belief.
- In re City Equitable Fire Insurance Company (1925) 1 Ch.D. 407 at 522 observes at page 434:
…an act or omission to do an act is willful, whether the person of whom he was speaking knows that he is doing and intends to do what he is doing : But if that act or omission amounts to a breach of duty and therefore to negligence, is the person guilty of willful negligence? In my opinion, that question must be answered in the negative unless he knows that he is committing and intends to commit a breach of his duty or is recklessly careless in the sense whether his act or omission is or is not a breach of duty.
- Govind v. Rangnath A.I.R. 1930 Bom. 572,
While examining a case of the directors’ liability for compensation for recklessly sanctioning acts of agents or managing agents, in a proceeding taken under Section 235 of the Companies Act, 1913, pointed out that although no doubt the liability of a director for damages for delinquency depends more or less on the particular circumstances of each particular case, and also the memorandum of association of the company, yet apart from this, where the directors have been willfully shutting their eyes to the acts of the agents or managing agents, and recklessly sanctioning acts of such agents consciously and thereby aiding misfeasance, misappropriation and falsification of balance-sheets and the state of affairs continues over a series of years, the directors are guilty of willful misconduct and are liable to pay compensation.
- Voluntary Hospitals of America, Inc. v. National Union Fire Ins. Co., 859 F. Supp. 260 (N.D. Tex. 1993), aff’d 24 F.3d 239 (5th Cir. 1994)
Where a lawsuit is brought with the “active assistance” of an insured, the exclusion bars coverage.
- Harad v. Aetna Cas. And Sur. Co., 839 F.2d 979 (3d Cir. 1988).
As a general matter, D&O policies do not provide coverage for liability associated with the provision of professional services. Thus, where a bank officer is liable for acts as a banker rather than an officer of the bank, a D&O policy with professional liability exclusion would not provide coverage. Similarly, where a doctor is the president of a professional corporation, the D&O policy would only protect him or her against liability from acts as president of the corporation, and would not provide coverage for professional malpractice claims. The line between professional services and acts outside the scope of this exclusion can be a fine one. Courts often draw a distinction between those acts that require special training or are at the heart of the profession and those acts that are administrative in nature.
- In Re Minoco Group of Companies, Ltd., 799 F.2d 517 (9th Cir. 1986)).
If the policy and its proceeds are property of the estate, the insured may need bankruptcy court approval to obtain proceeds from the insurer.
- In re Pintlar Corp., 205 B.R. 945
A claim brought pursuant to a liquidation plan is barred by exclusion.
CONCLUSION
Directors’ and Officers’ (”D & O”) insurance is increasingly of key importance in the boardroom and is becoming almost a necessity both for individual directors and for the companies which are required to indemnify them in the event of a claim or allegation being made.
“The larger the organization and the wealthier the board members, the greater the need for D & O insurance.”
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