Infosys, Tata boardroom battles make directors run for insurance cover

Companies reach out to insurers to provide individual cover to directors

The boardroom tussles at the Tata group and Infosys have raised a new fear in the minds of both executive and independent directors and key management professionals: What if they fall out of the board’s favour, and if there are legal liabilities on them individually? 

This apprehension has led to companies reaching out to insurance companies for individual cover for these professionals, so that they could be retained. 

Corporate directors have already been on guard since the new Companies Act assumed directors and the key management personnel to be the sentinels of governance. The attribution of criminality to the “officer who is in default” is established under section 2(60) of the Companies Act, 2013, with individuals having been made liable to penalty or imprisonment. A mere awareness of any wrongdoing makes an official liable to penal action and/or individually liable, says the Act.

Anup Dhingra, senior vice-president, Finpro practice leader, Marsh India Insurance Brokers, said, “After the recent boardroom battles, the demand for individual cover under the directors and officers liability insurance has increased.”

“Earlier, companies largely had blended cover for their and individual directors. But to retain the high-performing directors, who now also fear falling out of the board’s favour, companies are looking for individual cover with additional features that can take care of their liabilities. This is being used as a retention tool for high-performing directors,” Dhingra added. 

These liabilities include cover for legal cost, the cost of actual settlement, payout, regulatory and civil fines. Globally, over 60 per cent of Marsh’s clients buy individual cover for directors, called ‘Side A’ cover, but in India it’s still limited to US-listed or very large Indian companies. In India, the leading global insurance broker has over 1,000 blended policies but only 15 of these have separate Side A policies.

Depending on companies, these individual policies are bought for $5 million (Rs 33.5 crore) to $100 million (Rs 670 crore). The premium would be about $2,000 (Rs  1.34 lakh)  for cover worth $1 million (Rs  6.7 crore).

As major renewals are from April 1, Marsh said enquiries from companies for quotes for Side A policies or existing buyers looking at higher limits were rising. The insurance broker said this interest should translate into purchase in the coming weeks. 

These Side A policies respond even when the main policy fails, and they are also very broad in scope and have few exclusions, mainly related to personal profit.

ICICI Lombard, the leading private sector general insurer, is expecting the demand forSide A cover to increase in the background of the recent boardroom fights.

“The recent developments in closely-held companies have highlighted the need for a Directors and Officers (D&O) policy even in unlisted companies,” said Sanjay Datta, chief of underwriting and claims at ICICI Lombard General Insurance.

Side A cover in D&O insurance provides indemnification to board members when they are not indemnified by the organisation. This could be because the organisation is not allowed by law to indemnify the directors or if the organisation is bankrupt and has no resources to do so. 

A situation in which an organisation cannot indemnify directors is when they are named in a derivative shareholder action. This is when shareholders sue directors on behalf of the organisation, citing mismanagement at the organisation. The proceeds of such litigation are paid by the directors to the organisation itself, instead of the shareholders. “If in either the Tata Group of companies or at Infosys, such actions are brought, then a Side A policy could address the issue,” says Datta. 

Additionally, blended cover under D&O policy, which is what most companies purchase, excludes claims where both the litigating parties are covered under the same policy. Thus, under Side B cover, a company board or a company director suing another company director will not be covered. 

“Directors have a genuine concern about situations where they could be pulled into undesired legal tussles. They are evaluating enhanced D&O cover and expect their companies to take care of these concerns,” says Sai Venkateshwaran, partner and head accounting advisory services at KPMG.

ABC of insurance

Side A: Directors and officers directly

Side B: Directors and officers indirectly by covering the claims paid by companies

Side C: Companies for securities litigation claims and special claims not covered by general liability policies

Blended policy: With Side A, B & C cover