Directors’ & officers’ premiums increase on litigation fears

Directors’ & officers’ premiums increase on litigation fears

New Delhi: Several insurance companies have increased premiums on directors’ and officers’ (D&O) liability policies significantly in the past two months, anticipating a rise in litigation against top executives as companies liquidate and restructure assets amid the economic slowdown.

D&O cover—or professional liability cover—protects directors and other company functionaries against civilian liabilities arising from charges of harassment, discrimination, wrong disclosures, hiding information, inaccurate financial statements, mismanaging corporate assets, fraud and dishonesty.

This protection, however, is limited to legal expenses and doesn’t cover criminal liabilities and penalties.

“In the past two-three months, premium rates for D&O policies have gone up by around 20-50% depending on the risk profile of the company. In India, it has a total market of around Rs100 crore but given the recent downturn, the demand has increased for such covers," said Rahul Aggarwal, chief executive of New Delhi-based Optima Insurance Brokers Pvt. Ltd.

HDFC Ergo General Insurance Co. Ltd, Bajaj Allianz General Insurance Co. Ltd, ICICI Lombard General Insurance Co. Ltd and Tata AIG General Insurance Co. Ltd offer D&O cover.

“In India, the sum assured of D&O policy ranges between $1million (Rs4.98 crore today) and $5 million. The size of the cover and the premium charges depend on factors such as the net worth of a company and risk profile. Normally, a policy with the sum assured of $5million costs around Rs7 lakh (in annual premium)," said Aggarwal.

Premium rates on D&O cover are decided on a case-to-case basis and depend on liabilities company officials are exposed to in India and abroad, said Santosh Balan, marketing head of Bajaj Allianz General Insurance.

“If the risk levels of the company go up on account of retrenchment or other factors, the premium is accordingly calculated for the policy," Balan said.

Corporate lawyers say the economic slowdown and credit crunch that has hit companies could lead to an increase in litigation.

“In the case of companies going for restructuring and liquidation, personal liabilities are likely to go up on directors," said U. K. Chaudhary, a senior lawyer in New Delhi.

Litigation can be initiated by shareholders, creditors, customers, statutory authorities, employees and competitors. There is no cover under D&O policy for cases filed by the company or a director against another director.

“With renegotiation of commercial contracts, more prosecutions can come up in the period ahead," said Kalapataru Tripathy, partner at Amarchand & Mangaldas & Suresh A. Shroff & Co., a legal firm.

Some of the laws under which directors can be held liable are the Companies Act 1956, Prevention of Food Adulteration Act 1954, Child Labour Act, Negotiable Instruments Acts, Environment (Protection) Act 1986 and Wildlife Protection Act 1972.

“In the case of a company with high-risk profile, such as real estate companies, premium rates for directors’ and officers’ liability cover have gone up," said Pavanjit Singh Dhingra, vice-president of Prudent Insurance Brokers Pvt. Ltd, a Gurgaon-based insurance broking company.