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DIRECTORS AND OFFICERS LIABILITY INSURANCE
EXTENSIONS AVAILABLE AND NEEDED
NIRJHAR DUTTA FS10-023
INDEX 1. ROAD MAP AND DRAFT 2. INTRODUCTION 3. DIRECTORS’S AND OFFICERS LIABILITY INSURANCE 4. DIRECTORS 5. LEGAL AND ECONOMIC PRINCIPLE 6. BASIC COVERAGES 7. EXTENSIONS AVAILABLE AND NEEDED 8. CASE STUDIES 9. CONCLUSION 10. BIBLIOGRAPHY
ROAD MAP AND DRAFT SCOPE OF COVER AVAILABLE AND TYPES OF COVER AVAILABLE (Basic Study) The Scope of cover available is always clearly understood when first there is clarity on the target group whom to the Insurance cover serves. Who this Indemnity can be issued to is: Directors & Officers of the Company Former, Present and Future Directors of the Company Employees working in a Managerial and supervisory capacity Directors and Offices of the Holding Company Directors and Officers of the Parent Company; Existing Subsidiaries and Representation in Associate Companies.
What are the components that need cover? Directors and Officers Legal Liability Company Reimbursement Defence costs
A basic idea of the scope of cover available would be from a peripheral study of the following Agreements: Agreement A-Direct Cover to Directors Agreement B-Corporate Reimbursement to Directors & Officers Agreement C-Coverage for Entity Securities Agreement D-Cover for Employment Practices Liability
A bit deeper understanding would make us understand that A would provide Coverage directly to Directors and Officers for Loss and Defence Expenses from wrongful actions or decisions-
In this Agreement Reimbursement is available to the Extent permissible. (Various parameters) C is an Agreement that has achieved high Market focus as also to serve as a tool for Effective Corporate Governance. . This would provide for the Losses to Investors due to violation of Security Laws. The project will start from a brief description about what is D&O insurance and shall move onto to the basic types of policies available. the legal and economic principles upon which D&O insurance is based. SEBI Laws and for Non compliance of Clause 49 and similar statutory controls. the basic coverages and the extensions available and are needed to provide wholesome protection to the insured. D is an Agreement which provides cover for Employment Practices Liability-this agreement has also achieved great importance and focus in recent times –it provides against various kinds of Employment Practices violation (as viewed by the Employee and the Legal forum).Applies where Corporation does not indemnify its Directors and Officers B would effectively mean Corporate Reimbursement –this is why Companies go in for a B Agreement.
its importance in the Indian Business context especially with the recent liberalization of the Indian economy and the coverage it provides and the advantage to the corporates for availing such a policy and extensions which are currently available in the market and the extensions or coverage which may be needed. Thus the main aim of the project at its natural conclusion should be to give a panoramic understanding of the nature of D&O insurance. Even in the latter type of companies litigation possibilities are not completely ruled out and there are numerous instances of litigation between members of the family or once-upon-a time friends who mutually agreed to start a company. The recent years have seen a lot of developments in the insurance market in terms of products and services. majority of the large corporations maintain D&O liability insurance today. but for that matter it is erroneous to conclude that private or smaller companies and their directors are immune to such an insurance product. the D&O liability insurance claims are more from larger companies. listed or not always stand open to the risk of litigations from creditors. Globally.CHAPTER 1: INTRODUCTION Risk management is an important component of corporate governance practices and efficient management of the risk that key persons in a company are exposed to is therefore vital for every company. These apart. big or small. . in most of the countries in Europe and America. competitors and other public institutions. This project mainly deals with the coverage that a D&O policy offer and also the extensions. whether listed or unlisted. companies. Directors’ and Officers’ (D&O) liability insurance is one such product which has now become an important part of management liability insurance. Insurance is the best tool for risk management. customers. employees. vendors. banks. In general.
non-disclosure of interest. or shareholder derivative suits. mismanagement of assets etc. In countries like the United States. Such wrongful acts might be omissions. defence costs. Lawsuits covered may range from both civil and criminal suits to regulatory investigations and trials. misleading statements. to all stakeholders. Suits can be brought for various reasons by various stakeholders like the shareholders for insider trading. misstatements. suppliers. Following is a brief note on the possible ways to relieve directors from liability: Ratification by shareholders: Certain breach of duty by directors can be ratified by an honest disclosure of the same in a shareholders meeting and the latter deciding to ratify the directors by passing the required resolution. resulting from the wrongful acts and deeds of directors and officers of a company in their capacity as such. The idea behind is to encourage qualified and capable people to take up these important positions in the companies and for the companies to be able to retain them. In this age of corporate governance. the scope of directors’ duties have been enhanced so much so that in most cases the term ‘shareholder’ is replaced by the term ‘stakeholders’ and it is believed that the directors are bound by their duty of care not only to shareholders but also to creditors. by the creditors for misrepresentation of financial health of the company. by competitors for unfair trade practices. there are numerous situations in which the companies are not allowed to indemnify its directors or officers in which cases the D&O insurance comes in handy. errors. .CHAPTER 2: DIRECTORS’ AND OFFICERS’ LIABILITY INSURANCE Directors’ and Officers’ Liability Insurance. However. The Directors of a company are bound by their fiduciary duty towards the company and the shareholders. They can therefore be liable for breach of contract or breach of duty. customers and so on. and the directors. negligence. consequent losses etc. is one type of liability insurance whose beneficiaries are the directors and key officers of a company or the company itself. often referred to as just D&O Insurance. employees. neglect or breach of duty by such directors or officers. This substantially enhances their risk. There is a principal & agent relation between the shareholders and the directors. by consumers for defect or deficiency of product and services and by public organizations for various issues like pollution and other health hazards. lawyers’ fees. The payment of this liability insurance is made in order to cover various costs of a lawsuit like damages. corporate law makes it mandatory for companies to indemnify their directors and key officers against risk of personal liability arising by virtue of their position in the company. as agents are bound to act in the best interest of the shareholders.
Reasons for doing so are many.] 2[(2) Where any such officer has reason to apprehend that any proceeding will or might be brought against him in respect of any negligence. either wholly or partly. it appears to the Court hearing the case that he is or may be liable in respect of the negligence. misfeasance or breach of trust against an officer of a company. required the Registrar and such other person. When purchased together. even when it is for the sole benefit of directors and officers. as it thinks necessary. but that he has acted honestly and reasonably. default. a single insurance policy is normally issued which is entitled "Directors and Officers Liability and Company Reimbursement Insurance". D&O liability insurance: When all the above fails then comes the D&O insurance cover for protecting directors. from his liability on such terms as it may think fit: 1[Provided that in a criminal proceeding under this sub-section. the Court shall have no power to grant relief from any civil liability which may attach to an officer in respect of such negligence. Where a country's legislation prevents the company from purchasing the insurance. breach of duty. he may apply to the High Court for relief and the High Court on such application shall have the same power to relieve him as it would have had if it had been a Court before which a proceeding against that officer for negligence. if any. default. 1956. but commonly would assist a company in attracting and retaining directors. This is the essence of section 6331 of the Companies Act. Directors and Officers Liability insurance is commonly purchased with a companion product "Corporate Reimbursement Insurance" (or "Company Reimbursement Insurance"). misfeasance or breach of trust. by notice served in the manner specified by it. so as to demonstrate that the directors have paid a portion of the premium. misfeasance or breach of trust had been brought under sub-section (1). towards company. D&O insurance is usually purchased by the company itself. Business Judgement Rule: Next comes the business judgment rule which the courts might apply when a suit is brought against the directors and none of the above is applicable. breach of duty. he ought fairly to be excused.—(1) If in any proceeding for negligence. Power of Court to grant relief in certain cases. misfeasance or breach of trust. default. breach of duty. the company can definitely indemnify directors against liability arising out of their dealings on behalf of the company with third parties. fraud etc.] . misfeasance or breach of trust. breach of duty. default. Modern Directors & Officers policies now frequently include cover for the Company Entity itself as well as Employment Practice Liability. and that having regard to all the circumstances of the case. the Court may relieve him. Indemnification by company: While the company cannot enter into contract with directors to exempt them from any liability arising out of negligence. (3) No Court shall grant any relief to any officer under sub-section (1) or sub-section (2) unless it has. to show cause why such relief should not be granted. including those connected with his appointment. 1 633. a premium split between the directors and the company is often done. breach of duty. default.
employees. Failure to obtain competitive bids. the directors and officers are bound by duty towards the company itself. Unwarranted dividend payment. Ordinarily. This policy is necessary for directors and officers of every company if they wish to avoid potential litigation owing to Failure of supervision. Mis-statements in prospectuses. competitors. Inaccuracy in statements of financial accounts. Mismanagement of funds. customers. creditors. Lack of judgement and good faith. Unauthorised loans or investments. Any breach or non-performance in the duties can result in claims against the companies and/or its directors of the company by reason of any wrongful act in their respective capacity. The Directors' and Officers' Liability Insurance policy has been designed specifically to meet any financial liabilities imposed upon them. government and other regulatory bodies. . Intentional acts are not covered in D&O insurance. a number of adverse court verdicts regarding the liability of directors and officers of companies to a third party were passed where the directors and officers were held personally liable for payment of compensation to the third party.A common misperception of D&O insurance is that it makes directors or officers able to engage in acts they know to be wrong. this is not the case. shareholders. Only negligence by directors or officers would be covered. Using inside information. members of the public. Imprudent expansion resulting in a loss. In a recent spate of litigation. Wrongful dismissal of an employee. Misrepresentation in acquisition agreement for the purchase of another company. Misleading statements filed with the stock exchange. Allotment of shares. salaries or compensation.
THE MAIN EXPOSURES: Publicly Quoted Companies Subsidiaries with Outside Shareholders Joint Ventures Raising Additional Capital Mergers & Acquisitions Major Restructuring International Markets Private & Public Offerings Independent Directors on Board Opening branches/subsidiaries overseas. particularly in the USA .
or give them any other title. is called Director. the board of management. name matters nothing. have unlimited liability. hired by the company to direct its affairs. But. such as corporations. acting on its behalf. therefore. allow lenders and courts to only seize the assets of the business rather than the assets of the owners. defines a Director as any person. where the word refers to a . designate its Directors as governors. The function is everything. by whatever name called. It includes any person who occupies the position of a director is known as Director whether or not designated as Director. authorized by the Articles to contract in the company’s name and. on its behalf. appointed by the company to control the company’s business and. So long as a person is duly. They are rather the officers of the company. 1956: A company is a legal entity and does not have any physical existence.CHAPTER 2: DIRECTORS (WHO ARE COVERED?) MEANING OF DIRECTOR AS PER THE COMPANIES ACT. Some forms of business organization. they are not the servants of the company. meaning that the owner is personally responsible for the debts and obligations of the business. The Articles of a company may. liability refers to the responsibility for a company's debt or other obligations. liability is more frequently used in an accounting sense. The definition of Director given in this clause is an inclusive definition. It can act only through natural persons to run its affairs. and lenders or courts may look to the owner's personal assets for payment of these obligations. However. members of the governing council or. In business law. but so far as the law is concerned. Meaning of Liability: The word liability has two general connotations. The person. It is not the name by which a person is called but the position he occupies and the functions and duties which he discharges that determine whether in fact he is a Director or not. Section 2(13) of the Companies Act. They are professional men. he functions as a Director. occupying the position of Director. such as a sole proprietorship. Limited liability organizations. 1956. they are simple Directors.
There exists a relationship of a trustee and trust between the directors and the shareholders of the Company. not all liabilities are required to appear on the balance sheet. Therefore. 1956 Position of director: The directors are the custodian of the interests of the shareholders. The use of debt financing can magnify profits that would have otherwise gone unrealized. analysts must also carefully study the notes to a company's financial statements. Why liability matters? Information about a company's liabilities is a key component of accurate financial reporting and a crucial part of thorough financial analysis. The strictness with which the courts view the responsibility and the sacredness of the trust reposed in the directors had been emphasized in many cases. and although liabilities make up a significant portion of the balance sheet. where it was found that directors have applied the Company's money in payment of an improper commission. Although the Financial Accounting Standards Board. allowing it to use that cash for other. Their position is fiduciary vis-à-vis the Company. The directors must exercise their power for the benefit of the Company. and other regulatory bodies define how and when a company's liabilities are reported. Each section also specifies the penalty to be paid in case of default. Their position has further . imprisonment or both.claim on a company's assets. Liabilities often represent the company's ability to defer cash outlays. a liability is a required transfer of assets or services that must occur on or by a specified date as a result of some other event that has already occurred. Technically. but they are not always detrimental. possibly more profitable purposes until the obligation is due. The directors have been held trustees of the assets of the Company and in many cases the courts have directed them to reimburse the loss to the Company. the Securities and Exchange Commission. Excessive liabilities can ruin a company. Liability of directors under the Companies Act.
whether the Company is private or public. c) Return of Allotment of Shares in Form No. e) Registration of certain resolutions and agreements u/s 192 in Form No. 1956. Liabilities of Directors: The liabilities of the directors vary according to the status of the Company i. d) Change in Directors / Secretary (Appointment / Re-appointment /Cessation/ Resignation etc. carefully and without any negligence. But in all cases in discharging the duties of his position. he must act honestly. Filing of various documents with Registrar of Companies: a) Annual Return within 60 days of the annual general meeting.e. Managing Director. 2. modification and satisfaction respectively. 17 & 13. within 30 days of creation. Working Director and an ordinary Director under the Companies Act. The various liabilities of directors under the companies Act. 2 within 30 days of Allotment of shares. 23 within 30 days of passing of such resolutions etc. 1956: a) Board Meeting: b) Annual General Meeting c) Extra-ordinary General Meeting . Holding of various Meetings under Companies Act. f) Creation & modification of charges in Form No. 8 & 13 and Satisfaction of charges in Form No.) in Form No. 32 within 30 days of such change.changed in the era of Corporate Governance to the extent that the directors have to protect the interests of not only the shareholders but also other stakeholders. 1956 may be summarized as under: 1. b) Balance Sheet within 30 days of laying the accounts at the annual general meeting. In this article an attempt is made to define the extent and scope of liabilities of Directors viz.
Standard and degree of care and skill 6. f) Register of Charges: showing the particulars of charges on the assets of the company u/s 143. Maintenance of Statutory Books under Companies Act. the share held including the distinctive numbers. Special Statutory Protection against Liability [S. Managing Directors and Secretary Shareholding: showing the required details about shareholding etc. the amount paid on the shares etc. Managing Directors and Secretary: showing the required particulars about them etc. b) Register of Members: showing name. address and occupation of each member.3. of shares transfer etc. u/s 303 e) Register of Directors.633] 7. Liability for negligence 5. u/s 307. h) Register of Transfer of Shares: along with details relating to the transferor and the transferee and the No. : showing the required particulars u/s 301 d) Register of Directors.u/s 150/151 c) Register of interested Directors etc. Fiduciary Duties . 1956: a) Minutes Book: for Board meeting and General meetings separately u/s 193. g) Register of Investments showing particulars of investment u/s 49/ 372A. 4.
The federal district court ruled that although the directors chose the wrong course of action. Pa. 905 (D. The directors and officers of a corporation are responsible for managing and directing the business and affairs of the corporation. the directors pay utmost regard to the interest of all the stakeholders. Under the business judgment rule. they acted in good faith and therefore were not liable to the shareholders. sell assets. They often face difficult questions concerning whether to acquire other businesses. courts have given substantial deference to the decisions the directors and officers must make. 2 A legal principle that makes officers. if a gap is created due to lack of express legal provisions. directors. in plain language. D&O insurance would fill the gap.CHAPTER 3: LEGAL AND ECONOMIC PRINCIPLE BEHIND DIRECTORS AND OFFICERS LIABILITY INSURANCE POLICIES 3. so long as the transactions are made in good faith and with reasonable skill and prudence. a shareholder's derivative action alleged that corporate directors failed to obtain the best price available in the sale of Securities by dealing with only one investment house and by generally neglecting to "shop around" for the best possible price." . Co. The rule originated in Otis & Co. it is to be presumed that in taking any decision about the company management. Supp. In running a business. They may also face potential hostile takeovers by other businesses.1. 61 F. managers. 1945). The court reasoned that "mistakes or errors in the exercise of honest business judgment do not subject the officers and directors to liability for Negligence in the discharge of their appointed duties. LEGAL PRINCIPLE BEHIND D&O INSURANCE D&O liability insurance policies promote the concept of Business Judgment Rule2 which states that law presumes that directors of companies have bona fide regard for the interest of stakeholders of a company in running the management of the company and in taking important decisions. v. The intent of legislation is to encourage just and well informed decisions by the company management without fear of personal liability and thereby to help the business to progress and to ensure that the shareholders’ wealth is multiplied. In Otis. Pennsylvania R. D&O insurance is just another assurance of putting into practice the business judgment rule and protecting the directors who work in the best interest of the company. or issue stocks and dividends. Under this rule. and other agents of a corporation immune from liability to the corporation for loss incurred in corporate transactions that are within their authority and power to make when sufficient evidence demonstrates that the transactions were made in Good Faith. the officers and directors of a corporation are immune from liability to the corporation for losses incurred in corporate transactions within their authority. expand into other areas of business.C. To help directors and officers meet these challenges without fear of liability. The ultimate objective is to have the best business decisions.. resulting in a loss of nearly half a million dollars.
By being risk neutral they can take important decisions for the company based upon all necessary information available at hand at the time of taking decision and in this manner they can give their 100% to the company.THE ECONOMIC PRINCIPLE BEHIND D&O INSURANCE The basic principle that governs the D&O insurance regime is the economic concept of risk aversion and its effects.2. For companies. it is a cost benefit analysis. a company will be able to attract the most efficient and able candidates on board and key positions. . It can have an edge over its competitors. purchase of a D&O insurance policy by a company will also give it the signalling strength by which it can claim to be a good employer in the job market. This concept of economics would apply to a highly knowledgeable individual who might be unwilling to take up the position of a director simply because he is afraid of ending up with personal liability. both of which will benefit the company ultimately. with the right D&O coverage in place. A liability arising from their position in the company might not only cause financial losses to directors and officers. Such insurance can make a director or an officer risk-neutral if not risk-loving. There is no denying the fact that they have a large specific investment involved. Risk aversion implies the unwillingness of a person to accept a proposition which has an uncertain result and instead opt for another proposition that guarantees a certain result even if it be lower than the highest expected result in the first case. therefore.3. D&O insurance provides a shield in these cases. In the long run. The better you pay for insurance. So. the more qualified people you get. In addition to the above. the shareholders will be benefitted in the form of getting better returns and the society at large will also be better off in the sense that there will be increased productivity and increased job security. but at the same time their personal goodwill might also get tarnished.
barely one-tenth of companies listed on the Bombay Stock Exchange seem to have proper D&O liability insurance in place. for ultravires act. This serves as an important consideration before joining the board. Companies are indemnified against cost of litigation that it bears on behalf of its directors and officers. Statutory penal provisions provide for fines. of late the Securities and Exchange Board of India has been considering making it compulsory for all listed companies to have proper D&O liability insurance cover to protect their directors and officers from exposure to personal risk arising from corporate frauds and scandals. During the 1960s there were several mergers and acquisitions that led to litigations against companies and their directors and officers exposing their personal liability which only reconfirmed the need for companies to have D&O insurance upon the breach. for breach of contract. 1956. The law did not empower companies to indemnify their directors at that time. In India. statutory liabilities will be dealt with according to statutory provisions. However. he may incur liability for breach of fiduciary duties. They foresaw the need of such a product in the face of the great economic depression of 1930 that upset the economies of the United States and many other countries in a major way. for negligence or statutory negligence. The coverage limit is also much narrower and the insurance claims for directors and officers can generally be made for liability arising from misleading financial statements and mismanagement of funds only. He may incur both civil and criminal liability. directors and officers are very much conscious of the D&O insurance programme of the employer company. the popularity of this new product in the insurance market began to gain and laws were passed in the US that empowered companies to indemnify their directors and officers. the product did not sell well with the directors and officers of corporations and the D&O insurance policy failed to gain the required popularity. penalties or even imprisonment depending upon the gravity of the offence or contravention and the director may also incur unlimited personal liability under certain provisions under the Companies Act. A decade later. Considering the benefits and necessity. While for non-statutory liabilities the courts might apply business judgment rule to protect the directors. for wrongs committed by codirectors. despite the vast consequences. While mutual funds and insurance . for wrongful act or acts mala fide. In countries like US.CHAPTER 4: A WALK DOWN THE HISTORY OF D&O INSURANCE The history of D&O insurance dates back to the 1930s when the first policy was introduced by the British insurance and reinsurance provider Lloyd’s of London.
brokers in India are compulsorily required to take liability insurance cover. . there is no such mandate for companies as of now.
CHAPTER 5: BASIC COVERAGES At its most basic. Insuring Agreement A additionally may specify that coverage is limited to those claims connected to an insured's capacity as an insured director or officer of the company. D&O insurance protects directors and officers from liability arising from actions connected to their corporate positions. a claim may well arise out of an individual's multiple capacities. Although a claim sometimes implicates an insured in a single and clear capacity. Insuring Agreement [A] (D&O): (SIDE A) Although each policy will employ its own language. or lack of funds. For example. or in all three clauses. liquidation. an individual may be sued as a director and a shareholder of a company (perhaps as a purchaser or seller of company stock). Thus. conditions and deductibles. or (3) is financially incapable of doing so. The laws regarding indemnification differ from jurisdiction to jurisdiction. The limiting language may appear in the insuring clause. However. and even may be subject to distinct policy limits or sub-limits. A-Side Coverage applies where the corporation does not indemnify its directors and officers. (2) is permitted to do so by law and the company's bylaws but chooses not to do so.including defence costs . Due to general expansion in the industry. For example." typically provides coverage directly to the directors and officers for loss .resulting from claims made against them for their wrongful acts. some common threads run through each coverage offered in a D&O policy. In addition.or both. or an officer of a homeowner's association may also be a homeowner and it may not be clear whether his or her actions were taken as one or the other . D&O insurance has expanded beyond its original and basic coverage. . a corporations' lawyer may also sit on the board of directors. a single policy now may provide multiple and varied options by standard form or endorsement. the insurer typically does not have a duty to defend but is required to cover the costs of the insured's defence. in the definitions of "wrongful act" or "insured" found elsewhere in the policy. Insuring Agreement A. Similarly. market pressures and the industry's responses to the development of case law. The individual coverages discussed below typically are subject to distinct terms. A corporation may not indemnify its directors or officers because it either (1) is prohibited by law from doing so. due to bankruptcy. often referred to as "A-Side Coverage. D&O insuring agreements generally specify that coverage is limited to claims first made during the policy period. This issue of capacity recurs throughout D&O coverage analysis.
Employment Practices Liability Coverage: Employment Practices Liability ("EPL") coverage also has become a common addition to corporate coverage . 5. officers. however. it provides coverage for wrongful dismissals or failures to promote. sexual harassment. subject to the insurer's consent. The language and conditions of Insuring Clause B typically mirror Insuring Clause A.the insured generally has the right to select counsel. and other violations of federal. provide coverage for defence costs and give the insurer the right to associate with the defense and approve defence strategies. This coverage typically protects directors.often by endorsement to the D&O policy or as a stand-alone policy issued to the company. Right to Select Counsel: (A) The D&O insurer cannot impose its choice of counsel on an insured . or "B-side coverage. D&O policies typically provide that an insurer may not unreasonably withhold approval of an insured's . employees and/or the company against employment-related claims brought by employees and. They do. and addresses concerns and confusion raised by court rulings regarding allocation. For example. other policies. Entity coverage may be part of the policy form as "Insuring Agreement C" or may be added as an endorsement. in certain circumstances. Such coverage provides protection for the corporation for its own liability. B-side coverage does not provide coverage for the corporation for its own liability." reimburses a corporation for its loss where the corporation indemnifies its directors and officers for claims against them. Many policies today provide such coverage to the corporation whether or not its directors and officers are also sued. and settlements. expenditures. specified third-parties.1. state or local employment and discrimination laws brought by the company's employees. EPL claims have also seen a dramatic increase in frequency and severity over the past decade. The addition of entity coverage for securities claims is a relatively new development. Entity Securities Coverage: Many D&O policies offer an optional coverage to protect the corporation against securities claims. however. Insuring Agreement [B] (Corporate Reimbursement): (SIDE B) A typical Insuring Agreement B. Defence Issues: Most D&O policies do not impose a duty to defend on the insurer. provide such coverage only where the corporation is a co-defendant with its directors and officers.
Thus. certain exclusions only apply after a finding of fact has been made. the specific language found in these policies differs from insurer to insurer and from policy to policy. Although there are trends and standards within the industry. This feature is important to the insured corporation. where fraud is alleged. should the facts ultimately demonstrate a lack of coverage. and courts had seen very few cases in which they were asked to interpret those policies. Many of the issues affecting coverage cannot be resolved until the claim has been resolved. For example. Any coverage analysis must take into account the specific language found in the policy at issue. the number of D&O policy forms and cases interpreting them has multiplied. coverage is uncertain until the completion of the claim. advance defence costs . As a general matter. although insurers do not control an insured's defence. or should.is a common question. policies generally exclude coverage for losses arising out of fraud. which typically has developed ongoing relations with corporate and litigation counsel that it would want to use in high-stakes litigation against the company. In connection with the first question. clear policy language will govern the application of coverage to a particular claim. In other words. Today. many policies provide that insurers advance defence costs under the condition that. however. insurers may have an interest in not advancing defence costs until coverage is certain. Key Provisions and Exclusions: Twenty years ago. pay them as they are incurred . the insured will reimburse the advanced monies. (B) Reimbursement and Advancement of Defence Costs Although D&O insurers generally do not have a duty to defend. In such situations. 5. Thus. an insured or his chosen counsel does not get a blank check. under D&O policies they are required to reimburse only reasonable defence costs arising out of covered claims. underwriters offered D&O policies based on two basic forms. insurers have an interest in seeing their insured vigorously defend claims against them. D&O policies do cover defence costs.2. The exclusion only applies. Definition of Claim: Common to all coverages in a D&O policy is that each insuring clause generally provides coverage on a "claims-made" basis. as discussed below. A vigorous defence can be a costly endeavour that may be well beyond the means of an insured. it provides the coverage described for . Whether a D&O insurer must. Thus. Specifically.choice of counsel. However.that is. where there is a final judgment finding fraud. The primary questions that arise in connection with the payment of defence costs regard (1) control over the costs incurred and (2) when the insurer must make defence payments.
and matters uninsurable under law. judgments. v. Many policies also include limiting a claim to those proceedings or demands made against an insured in his or her capacity as an insured. If it is an employment claim. and the policy so provides. a claim may be made against the company. a director or officer. 1979). Cox. criminal or administrative proceeding. taxes. Those states that do permit punitive damages to be assessed may not permit insurance against them. For example. App. a D&O policy generally will cover the base amount. and the policy so provides. 1989).claims made during the period for which the coverage is purchased.g. v. treble (or other multiplied) damages. See e. the insured typically must report the claim to the insurer during the policy period or within a reasonable time. or (2) written demand for damages against an insured.2d 566 (Neb. if it is a securities claim.g. but not the multiplied portion of the loss. That is. a claim may be made against the company or against a director or officer. Co. 494 (Cal. Rptr. Who is included as an insured will depend on which coverages are implicated and how the term is defined in the policy. Additionally. Loss usually excludes fines or penalties. or an employee. Some policies offer more detailed definitions of claim." either of which may be part of the definition of claim. 151 Cal. mediation or other alternative dispute resolution.. Where included. The longstanding reasoning is that the assessment of punitive damages is . coverage of punitive and exemplary damages explicitly is effective only where permitted by applicable law. Definition of Loss: Loss generally includes damages. a policy may state that a civil proceeding includes arbitration. Globe Indem. A policy may also explain that an administrative proceeding includes a formal investigation. See e. Punitive or exemplary damages: Some states do not permit punitive or exemplary damages to be assessed at all. Distinctive Printing and Packaging Co. Ct. D&O policies generally define claim as any (1) civil. 443 N. Some policies include punitive and exemplary damages in the definition of loss. The capacity issue may be stated directly in the definition of claim. Those states prohibiting coverage of punitive damages generally base the prohibition on public policy concerns. Where treble or multiplied damages are assessed. settlements and defense costs. City Products Corp. awards. or may be stated in the definitions of "insured" or "wrongful act.W.
Insured Exclusion: As the name implies. (2) by a shareholder unless the shareholder is acting independently and without input from any insured. 2. coverage for liability for fraud may be barred by law. coverage for punitive damages also may be barred by law. In addition.. For example. barring coverage in connection with an insured's illicit gain. Id. officer or corporate insured) against another insured. The dishonesty exclusion also may be coupled with personal profit exclusion. The . and permitting insurance against such punishment would render such punishment ineffective. or (3) at the behest of an insured. an insured versus insured ("IvI") exclusion bars coverage for claims made by an insured (e. As discussed above. Exclusions1. 5. a caveat providing that the acts or knowledge of one insured will not be imputed to any other insured for the purposes of applying the exclusion. In connection with this clause. as they currently are written. a director. or wilful violation of laws or statutes. Matters uninsurable under applicable law: Matters deemed uninsurable under law also may be the basis of explicit exclusions elsewhere in a policy. many dishonesty exclusions include an adjudication clause. These exclusions typically are followed by a severability clause . the case law on this subject supports the position that most adjudication clauses.3. the exclusion may bar coverage for claims brought (1) by anyone directly or indirectly affiliated with an insured. fraud. the question arises whether the judgment or other final adjudication must be in the underlying litigation. As mentioned above.intended to set an example or punish the wrongdoer. Insured v. rather than in a parallel coverage action or other lawsuit. For the most part.that is. the exclusion only bars coverage for the insured(s) whose acts or knowledge are the basis of the claim at issue. In other words. which provides that the exclusion only applies if the fraud or dishonesty is established by a judgment or other final adjudication.g. Courts have held either that (1) the adjudication clause is ambiguous. as well as by dishonesty exclusion. Dishonesty Exclusion: Dishonesty exclusions bar coverage for claims made in connection with an insured's dishonesty. so must be interpreted in favour of coverage. require a final adjudication in the underlying litigation.
3. Conflicts primarily arise regarding the second component of this exclusion. or at the behest of the insured. 5. and would not provide coverage for professional malpractice claims. the question arises as to when a subsequent claim is based on sufficiently overlapping facts and circumstances to fall within the scope of the . or another agreed upon date. where a subsidiary is acquired. when a lawsuit is brought with the indirect involvement of. Professional Liability Exclusion: As a general matter. the prior acts exclusion may exclude coverage for the subsidiary prior to the time it became a subsidiary. 4. where a doctor is the president of a professional corporation. and (2) subsequent claims based on the same facts or circumstances. Questions regarding the application of the exclusion arise in the context of derivative lawsuits. The line between professional services and acts outside the scope of this exclusion can be a fine one. Specifically. For example. the D&O policy would only protect him or her against liability from acts as president of the corporation. bankruptcies and receiverships.exclusion essentially prevents a company from suing or orchestrating a suit against its directors and officers in order to collect insurance proceeds. where a bank officer is liable for acts as a banker rather than an officer of the bank. 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. and there is very little case law expounding on the issue. The date may also coincide with a change in corporate status . In such situations. Prior and Pending Litigation Exclusion: Prior and pending litigation exclusions generally exclude coverage for (1) claims pending prior to the inception of the policy. Similarly. D&O policies do not provide coverage for liability associated with the provision of professional services. however. It is not always clear. the exclusion bars coverage. a D&O policy with professional liability exclusion would not provide coverage. the subsidiary may have run-off coverage from a previous policy to protect against liability arising from those excluded acts.such as a merger or acquisition. Prior Acts Exclusion: Prior acts exclusions bar coverage for claims arising out of an insured's wrongful acts prior to a specified date. it is clear that where a lawsuit is brought with the "active assistance" of an insured. Thus. Specifically. The date may coincide with the termination of coverage under a previous policy.
. Courts have held that the two claims need not be brought by the same plaintiffs to trigger the exclusion.exclusion.
Extradition costs The insurer agrees that defence costs shall include extradition costs. Investigation costs The insurer agrees that defence costs shall include investigation costs. Bail bond and civil bond expenses The insurer agrees that defence costs shall include bail bond and civil bond expenses. Emergency costs coverage The insurer agrees to pay up to 10% (ten percent) of the indemnity limit in defence costs incurred in an emergency without our prior written agreement. dispersal. pollution defence costs Where a claim made against an insured person arises from a wrongful act or employment practice breach actually or allegedly committed in connection with the discharge. provided the insurer are then asked to give their written agreement within 30 days of those defence costs first being incurred. release or escape of pollutants. Public relations expenses The insurer agrees that defence costs shall include public relations expenses. The total amount we agree to pay under this extension 2. the insurer agrees that exclusion (pollution) shall not apply to: (a) Defence costs. they will still advance defence costs on behalf of that insured within 30 days of being invoiced for them by defence counsel. Defence costs advanced on behalf of an insured who is not entitled to the cover set out in this policy must be repaid to the insurer. the total amount we agree to pay under this extension for all investigation costs payable on behalf of all insured’s shall not exceed the amount stated in item 4 of the schedule to this policy.6 for all bail bond and civil bond expenses payable on behalf of all insured’s shall not exceed 10% (ten percent) of the indemnity limit. or . the total amount we agree to pay under this extension for all public relations expenses payable on behalf of all insured’s shall not exceed the limit expressly stated. Advance payment of defence costs Where the insurer have not decided whether an insured is entitled to the cover set out in this policy.CHAPTER 6: EXTENSIONS AVAILABLE AND NEEDED The extensions are subject to the insuring clauses and all other terms and conditions of the policy.
we agree to pay under this extension for all claims for all insured persons shall not exceed 10% (ten percent) of the indemnity limit in the aggregate.(b) Loss. the indemnity limit shall be reduced by the indemnity limit stated in the schedule of that other insurance. and (b) Any other available insurance or source of indemnity available to an insured person has been exhausted. loss which results from a claim first made against them and reported to us during the insurance period alleging a wrongful act. New subsidiary cover Where conditions (a) to (d) of this extension are satisfied. Outside directorship covers The insurer agree to pay on behalf of each outside director. The total amount. we agree that the definition of insured entity shall include a subsidiary created or acquired during the insurance period. in addition to the indemnity limit. The conditions referred to above are as follows: (a) The indemnity limit has been exhausted. The total amount we agree to pay under part (a) of this extension for all defence costs payable on behalf of all insured’s shall not exceed the limit provided. but only where the claim is a derivative action brought in the name of an insured entity by someone who is not an insured person. Additional excess limit for insured persons Where conditions (a) to (b) of this extension have been satisfied. the insurers agree to pay on behalf of each insured person. loss which an insured entity is not permitted or required to pay them by way of indemnity and which results from a claim first made against that insured person and reported to us during the insurance period. If any other insurance available to the outside director is provided by the insurer. the insurers agree that the bodily injury/property damage exclusion from radioactivity and nuclear risk shall not apply to defence costs. Occupational health and safety defence costs Where a claim made against an insured person arises from an actual or alleged breach of any occupational or workplace health and safety legislation. The conditions referred to above are that a subsidiary: . Cover under this extension is excess of any other insurance or indemnity available to the outside director. but only in relation to a wrongful act or employment practice breach actually or allegedly committed after the date that subsidiary was created or acquired.
of any claim first made against the insured before or during the discovery period alleging the occurrence of a wrongful act or employment practice breach prior to the end of the insurance period. and (d) Does not undertake activities which attract one or more of the provisions of the securities act of 1933 (usa). country. heirs. (b) Has total gross assets within the United States of America or Canada or their territories or possessions which are less than 25% (twenty five percent) of the total gross assets of the insured entity. The insured is entitled to a discovery period of: . legal representatives or assigns of any deceased or mentally incompetent insured person. Heirs. replaced with similar cover or cancelled. or the equivalent in Canada and any of its territories or possessions. If any of the conditions listed above cannot be satisfied then our prior written agreement by way of endorsement to this policy will be required before the cover available under this extension will apply. any rules or regulations of the securities and exchange commission (usa). the securities exchange act of 1934 (usa). (c) Is incorporated outside of the United States of America or Canada or their territories or possessions. but only in relation to a wrongful act or employment practice breach actually or allegedly committed whilst the entity was a subsidiary. the insured may give us written notice within one of the applicable discovery periods set out in this extension. or territory rules or regulations or local or provisional statute in the united states of America or any of its territories or possessions relating to securities. but only in relation to a wrongful act or employment practice breach actually or allegedly committed by such insured person. state. Former subsidiary cover The insurer agrees to extend the cover available under this policy to any entity that ceases to be a subsidiary either before or during the insurance period.(a) Has total gross assets outside of the United States of America or Canada or their territories or possessions which are less than 25% (twenty five percent) of the total gross assets of the insured entity. or any federal. estates and legal representatives The insurer agrees to extend the cover available under this policy to the estate. Bi-lateral discovery period Where the insurance period has ended and this policy has not been renewed.
granted automatically with no additional premium payable. if the insured asks for such period in writing within 15 days of the end of the insurance period and pays. we may reasonably impose. or (ii) A discovery period is purchased by the insured under extension (bi-lateral discovery period). cancelled or replaced with similar cover. Retired directors and officers The insurers agree to extend the cover available under this policy to any insured person who retires before: (a) A transaction. if a transaction takes place and the insured asks for such period in writing within 30 days of the end of the insurance period and accepts any terms and conditions. receivership. The cover this extension provides will be automatically withdrawn if: (i) This policy is renewed. a further premium of 50% (fifty percent) of the annual premium we charged for the insurance period.(a) 90 days. or (b) 12 months. Tax extension The insurers agree to extend cover to include an insured person’s loss arising from their personal liability for unpaid taxes where the company has become insolvent except to the extent that such liability arises from the wilful intent of the insured person to breach any statutory duty governing the payment of taxes. or (b) The insolvency. or (c) The end of the insurance period but only in relation to a claim first made against them within 84 months of the end of the insurance period which alleges they committed a wrongful act or employment practice breach before they retired. or (c) 72 months. The total amount the insurers agree to pay under this extension for all crisis loss payable on behalf of all insured shall not exceed to the amount mentioned in the policy and is part of. The total amount we agree to pay under this . including an additional premium. liquidation. within a further 15 days. Any discovery period purchased under this extension cannot be cancelled and any additional premium paid for the discovery period is not refundable. Crisis containment The insurers shall reimburse the company for the crisis loss which the company incurs by reason of a crisis event which first occurs and is notified to us during the insurance period. and not in addition to the indemnity limit. bankruptcy or administration of the insured.
or ought reasonably to have known. and not in addition to. be explained by fraud. apply to such claim or circumstance. and (iii) The insured has maintained. and (ii) The insurers may. and is part of an not in addition to the indemnity limit. or the terms and conditions of this policy. and (c) Gives notice of that claim or circumstance to us during the insurance period we agree not to apply exclusion (a) or (c). on or after the continuity date of any claim or circumstance that could give rise to a claim. Deprivation of assets extension The insurers agree that defence costs shall include deprivation of assets expenses the total amount we agree to pay under this extension for all claims for all insured persons shall not exceed the limit prescribed in the aggregate. in their view. any of the terms and conditions of the insurance providing directors’ and officers’ liability cover in existence when the insured first knew. or ought reasonably to have known. in their absolute discretion. without interruption. Prosecution costs The insurers agree that defence costs shall include the prosecution costs the total amount we agree to pay under this extension for all claims for all insured persons shall not exceed 10% (ten percent) of the indemnity limit in the aggregate. and is part of and not in addition to the indemnity limit. a directors and officers liability insurance policy issued by us and we were the directors and officers liability insurer when the insured first became aware of such claim or circumstance for the purposes of this extension. and (b) Did not give notice of that claim or circumstance under any previous insurance providing directors’ and officers' liability cover on or after the continuity date as shown on the schedule. provided that: (i) The insured's failure to give earlier notice of such claim or circumstance to the insurer cannot. . the indemnity limit Continuous cover Where the insured: (a) First knew. continuity date means the date stated in the schedule.extension shall not exceed the limit prescribed expressly and is part of. of it.
Fines and penalties extension The insurers agree that the definition of loss is extended to include any civil fines and civil penalties awarded against an insured person imposed by law. . The total amount we agree to pay under this extension for all claims for all insured persons shall not exceed 10% (ten percent) of the indemnity limit in the aggregate. and is part of an not in addition to the indemnity limit. provided that we are not legally prohibited from paying the civil fines and/or civil penalties under the law applicable to this policy.
CONCLUSION: The business of liability insurance is just in its infancy in India. was bout the extensions that are available and that are needed in directors and officers liability insurance policies. the number of companies that are being incorporated and the number of companies that currently going for listing is simply amazing. The project allocated to me. But given the booming economic situation in our country and the current pace of economic development that are currently going around in all parts of the country. and this is an exciting phase in the given point of time. this an phase of growth a consolidation of growth and consolidation for the corporate houses operating in India. this makes u wonder so much is left to do in the insurance market. This also gives rise to liability to the directors jointly and severally for actions taken by them in the course of their employment. That is there is a lack of product innovation and the market being as large as it is. According to the latest numbers released by FICCI. the liability is not only emanates from the common law but also from around 450 statutes that enforces mandatory duty upon a director. there should some market research and product innovation for the directors. in fact given the size of the Insurance market in general in India and the given penetration figures given by the IRDA. This gives a fairly good idea how big is the market and from this point this only going to get bigger.000 SME and corporate houses operating in India. . The entry of foreign insurers and the proverbial struggle between the old guard and the new guard makes for a exciting time to be in the market right now. Thus to conclude it is the opinion of the researcher the covers and extensions available though adequate in the current market scenario would become woefully ineffective in the very near future. there are almost 83. In comparing the covers available in India and in foreign I realized the Indian insurers have followed the western concepts but there isn’t any singular that stands out. Thus this project talked about the current protection available to them in the Indian context and what covers and extensions should be extended by the insurers towards providing better coverage towards the directors. so the insurers are advised to innovate the basic coverages available. In fact when making the project I came to understand the acute responsibility a director faces.
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