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Directors feel heat, seek cover against legal action

Insurers say that the regulator’s action against directors of a large private bank have triggered claims under the policy. The regulatory action against IL&FS is also believed to have triggered a claim by the erstwhile management.

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Last Updated: Feb 14, 2020, 10.35 AM IST
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(This story originally appeared in on Feb 14, 2020)
MUMBAI: The directors & officers’ (D&Os’) insurance policy, which compensates key management personnel of a company against legal actions, is seeing a surge in demand. The cover, which was earlier being purchased by businesses with a global exposure, is now being bought by companies with only domestic stakeholders as well.

The trigger for the renewed demand for this cover has been the amendment to the Companies Act last year. Under this, the government can ask the National Company Law Tribunal to hold directors and key management personnel responsible without any limit to liability in the event of fraud.

Besides this, there have been several actions by enforcement authorities against directors in recent times, particularly in the financial sector. Insurers say that the regulator’s action against directors of a large private bank have triggered claims under the policy. The regulatory action against IL&FS is also believed to have triggered a claim by the erstwhile management.

“Another significant cause for a spike in claims has been in the employment practices coverage afforded to some large IT companies. Many of them have employees in the US, which is a highly litigious geography in this area and the industry has seen many claims coming from this exposure. It has an impact on the pricing of the policy,” said IFFCO Tokio General Insurance EVP (underwriting) Subrata Mondal.

According to Praveen Vashista of Howden India Insurance Brokers, there has been a big surge in demand for D&O policies. “We are seeing lots of demand for D&O, which is part of the liabilities business. Because of increased demand, we have enhanced the size of our liability team and now have 55 people,” said Vashista. Insurers say that before joining, directors are asking companies whether they have a policy that will protect them from liability claims.

According to Mondal, rates for D&O cover are firming up in sectors like finance, IT and real estate where the industry has seen a spike in regulatory action, financial downturn and consequent claims under D&O. “The claim payouts always start with defence costs and often involve out-of-court settlements. Given the length of the judicial process in many countries and long-tail nature of liability claims, the defence costs are high, and settlement is mostly out of court,” he said.
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D&O policies cover key officials against legal action from regulators, shareholders or employees. Besides covering the cost of legal fees for the defence, it also pays penalties. If there is a regulatory fine on an individual, which is civil in nature, the D&O cover will get triggered, provided coverage for civil fines and penalties have been granted. If the fine or penalty is criminal in nature or has criminal undertones, the policy will not cover it, but it will allow the insured to defend the imposition of the same.

Promoters are also facing regulatory action because of the insolvency process during which violations come to light. The D&O cover can be extended for directors for past actions even after the board is dismissed, provided it has been purchased in advance. “When we underwrite a D&O policy, an important underwriting criterion is the financial health of the company. Most insurers generally frown upon granting a D&O to a company whose finances are distressed or already in the red. Higher claims activity will often see a higher demand for the insurance product from the industry,” said Mondal.

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