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D&O insurance, offered by general insurance companies, will cover for legal cases filed against directors and officials in managerial positions until proved guilty. If the officials are proved guilty, the cover will cease. The insurance company has the right to recover the expenses (paid by it if individuals are proved guilty) from the company, says Sanjay Datta, chief-underwriting & claims, ICICI Lombard General Insurance.
D&O, taken by a company for individual directors, was envisaged as a cover to protect directors from the financial perspective if any case was filed against them, by any shareholder, customer, vendor or other third party. This is because even if the case is against the company, it is the director who is the face.
Its importance increases especially in the event of death of the director or if the director leaves the company. There could be cases pending against him/her or a case could be filed against some decision taken by the director, after he/she has left the company. In such a case too, the policy taken by the previous company will cover the case because the D&O policy pays for current directors and also past directors, for a certain period. Typically, the policy covers the director up to three to six years after the individual has left the company. If the company does not take a D&O policy, then the official is liable to pay the legal costs from his pocket.
The premium for a D&O policy works out to 0.5 per cent of the limit of the cover or sum assured. For a Rs 100-crore cover, the annual premium works out to Rs 50 lakh.
Among instances where a director of the company could be liable to face legal action include regulatory investigations, accounting irregularities, exposures relating to mergers and acquisitions, corporate governance requirements, shareholder/stakeholder complaints, complaints related to mismanagement of funds, unfair allotment of shares, using insider information, unwarranted dividend, salary, compensation, unfair dismissal of an employee, etc. Initially, only directors were covered under the policy. Later on it was extended to officers too. This includes all officers who take managerial decisions, that is, officials ranked lower than the CEO, says Datta.
“Today, with so much importance on corporate governance under the new Companies Act, any stakeholder can file a case against the company’s director or official. While it is important even for proprietary firms to take D&O insurance, in India only listed companies take it, since it is not mandatory. But if you want to list on the New York Stock Exchange, for instance, taking a D&O cover is mandatory,” he says.
According to K K Mishra, CEO, Tata AIG General Insurance, D&O cover is particularly useful for independent directors. “The new Companies Act has the provision for class action suit. So, there could be cases filed against the independent companies, even if they are not involved in any wrongdoing. In such cases, it is important for companies to take D&O cover,” he says.
For instance, in the Satyam scam, the D&O cover paid for defence costs of independent directors, but not the directors who were found guilty of perpetuating the fraud.
If the court awards compensation to the complainant, then the cover will pay for it only if it is proved that there is no breach of law, says the CEO of Vantage Insurance Brokers & Vantage Wealth Management Service. “It varies on a case-to-case basis. If there is no negligence on part of the director or if the wrong doing is due to an oversight, but the court asks the company to pay compensation, then that would be typically covered by the insurance,” he says.
Instances of insurance companies recovering the defence costs from the corporation if fraud is established, however, are very rare, says Datta. It can only be done by filing a counter case against the corporation. “It is like trying to recover a bad loan,” he says. Nevertheless, why take chances, when the stakes are so high.
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