Covid-19 brings insurance policies for directors back into mainstream

An insurance offering that almost became a laggard is getting back into the mainstream, thanks to Covid-19. Despite the growing frequency and severity of claims, many intermediaries stopped selling the Directors and Officers (D&O) Liability insurance because the product became very commoditised in the recent past, and the servicing demands attached to it were high.

Starting from the Bhopal Gas tragedy of 1984, the Indian insurance industry began to realise the need for domestic expertise in liability classes. Despite a D&O product becoming available by the late 1990s, Satyam Computers was a wake-up call. While overseas shareholders could as a class bring action and seek remedy from Satyam, domestic shareholders were left high and dry.

Ironically, the Companies Act 2013 should have been a trigger for a pricing correction. Among many significant developments, it formalised the definition of an independent director, made the role of auditors more onerous and introduced the provision for class action. These are potentially the very triggers underwriters the world over dread. From time to time, media reports on Indian brands drawn into overseas class action do appear. Two of the most prominent in the recent past are those against Tata Steel in the UK and Dr Reddy’s in the US.

India has yet to see any domestic class actions. Is it because we are not a litigious society? Or is it also because we do not have a contingency fee proviso for lawyers? Keen observers believe that the best possibility for a class action trigger could be either when a 100 per cent foreign-owned company steals Indian shareholders’ money, or a blue-chip domestic entity decides on a mass layoff.

Effect of Covid-19

So, how does the status change post-Covid-19? Enlightened buyers, particularly those with complex global exposures to litigious markets, are waking up and demanding sophisticated covers for their specific needs. These include Business Interruption and Trade Credit in particular. Moreover, there is a strong desire to understand the interplay of all related covers.

While it is still early days, some independent directors and professional advisors have begun to assert what they will do and what they will not, and they want to have that preferably in black and white. They also wish to understand what the D&O and other professional indemnity covers can do for them and what they cannot. And mind you, legal expenses in India, too, are rising sharply. Yes, we are not as bad as in the US where sky-high premiums recently drove Elon Musk of Tesla to come off a D&O cover. He prefers to carry the risk on his personal balance sheet. Having low limit covers in India is no good, anymore.

The troika: ESG

As we grapple with getting the governance around our businesses right, we need to be reminded that the space has expanded to include Environment, Societal and Governance (ESG). Much of the climate change action falls in the realm of the environment. Moreover, climate change and a pandemic are but two sides of the same coin. Analysts and commentators have been painting the pandemic as a Black swan, which it is not. Even Nassim Taleb, who coined the metaphor, calls it a white swan. We saw it coming yet chose to ignore it. In the context of another cover, Wimbledon opted for an infectious disease extension with their event insurance. They learnt from SARS. Likewise, the University of Illinois (Urbana Champaign) anticipated a threat to their management school’s predominant dependence on students from Mainland China. These two are outstanding examples of how risk management and risk transfer ought to go hand in hand.

Moreover, activism around environmental issues is rising already. The first-ever pandemic-related lawsuit under a D&O was filed against Norwegian Cruise Line Holdings over Securities Laws Violations. It was alleged that Norwegian was employing sales tactics of providing customers with unproven or blatantly false statements about Covid-19 to entice customers to purchase cruises, thus endangering the lives of both their customers and crew members.

Businesses, in India, as they gradually reopen after an extended lockdown, will need to be particularly mindful of the well-being of both their customers and their staff. The nasty accident recently at LG Polymers in Vizag should serve as a stark reminder.

It is currently the employee that is the most important component of society in the times of corona. The new demands of work from home (WFH), usage of technology devices to hook up from outside the secure closed networks, wage cuts, layoffs, performance appraisal challenges, and intense electronic surveillance once back to the four walls of the office — all these provide a long list of possibilities. The very thought of insisting that an employee commute in a Mumbai local to his workplace, as and when they restart, is dreadful.

Get the cover right away

Companies need to learn from all that is unfolding and anticipate what is in store. The lesson is straightforward. If you are in any form of business, whether local or global, and do not have a directors and officers cover, seriously reconsider. If you have one, revisit the coverage and limits. If you do not offer them adequate protection, quality independent directors will not agree to serve on your board, if they foresee risks to their personal assets. This is a growing trend. Do not go for cheaply priced covers, avail reasonable coverage limits, and also look at all other insurances in conjunction with the D&O cover. And remember, insurance is but a part of overall risk management. There should be no trade-off.