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D&O Liability Insurance

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D&O Liability Insurance

  1. 1. D&O LiabilityProtection of Personal AssetsRam Garg CFA, MBAPractice Leader – Financial & Casualty LineJ B Boda Singapore
  2. 2. DisclaimerThe information provided should not be relied on as legal advice or a definitivestatement of the law in any jurisdiction. For such advice, an applicant, insured,listener or reader should consult their own legal counsel.J B Boda 2
  3. 3. Directors’ Duties andLegal FrameworkJ B Boda 3
  4. 4. D&O Insurance “A study sponsored by McKinsey shows that 36% of corporate directors polled actually admitted that they did not fully understand the risks faced by their company…others may have had their doubts but did not like to say so” Economist, Jan 24, 2004J B Boda 4
  5. 5. Legal liabilities of Directors & Officers Directors of a company have several duties and liabilities imposed on them under various provisions of the law Duties can be found under common law and statutes. Statutes such as the Companies Act impose on directors the duty to act with care and skill If directors are held to be personally liable, they would have to defend and pay the damages on their ownJ B Boda 5
  6. 6. Legal liabilities of Directors & OfficersRegulators in Asia are moreactive and focusing on; – Transparency and disclosure – Financial reporting – Board practice All above factors deriving greater expectation of best corporate governance practiceJ B Boda 6
  7. 7. Directors’ & Officers’ Liability InsuranceJ B Boda 7
  8. 8. What is D&O Insurance?D&O Insurance provides indemnity for theIndividual Directors and Officers of acompany against their legal liability to paydamages to third party claimants as aconsequence of the third party havingsuffered financial loss through thenegligent act, error or omission of theDirector or Officer in his/her “managerialcapacity”.In other words, it is a “ManagerialNegligence” coverJ B Boda 8
  9. 9. D&O Insurance – Insured Persons – All Past, Present and Future Directors and Officers (Ds&Os) of the  Insured Organisation; and  Its Subsidiaries – In relation to Employment Practices Liability claims, all employees – Spouses and legal representatives of Ds&Os for Wrongful Acts committed by said Ds&OsJ B Boda 9
  10. 10. D&O Insurance - Structure Claim or allegation made against Directors or Officers (D&O’s) Claim or allegation notified to Underwriters Q: Can and will the Company indemnify the D&O’s? No Yes Insurers advance Costs and Expenses to the D&O’s under the The Company advances Costs and D&O Section of the Policy Expenses to the D&O’s The Company recovers their outlay under the Company Reimbursement Section EXCESS OF THE DEDUCTIBLE Liability of the D&O’s is finally determined through the courts or settlement negotiations involving D&O’s, The Company and Underwriters Q: Is the Company legally able to indemnify the D&O’s for their liability? No Yes Insurers indemnify the Company under Insurers indemnify the D&O’s under the Company Reimbursement the D&O Section of the Policy Section EXCESS OF THE DEDUCTIBLEJ B Boda 10
  11. 11. Claim ScenariosJ B Boda 11
  12. 12. Claimant Ranking 1. Third party (30-50%) 2. Regulatory/Gov Body (10-30%) 3. Employees (20-30%) 4. Miscellaneous (10-20%) 5. Shareholder (Below 10%)Source: various figures from different D&O insurers within Asia region J B Boda 12
  13. 13. Common types of claimsa) Shareholders: mismanagement, decline in investments, performance of the company, misrepresentation in offering documents, bad investment decisionsb) Employees: employment practices claims such as discrimination, harassment, libel and slander, improper working conditionsc) Investors: misrepresentation and misleading informationd) Competitors: unfair business practice, libel and slandere) Regulators: breach of statutory provisions, market misconductJ B Boda 13
  14. 14. D&O Claim by Regulators1. Market Misconduct: (a) Insider trading (b) Price rigging (c) False trading (d) Market manipulation (e) Disclosure of false and misleading information2. Directors breaches of Statutory DutiesJ B Boda 14
  15. 15. Real Claim ExamplesIndustry Public CompanyCoverage Section Directors’ & Officers’ LiabilityCause of Action InvestigationType of Organisation Minerals ProcessingNumber of Employees 112Revenue $25 millionDESCRIPTION OF EVENTThe Financial Regulator (The Regulator) issued notices to attend interviews to four directors and officersof the insured minerals processing company. The Regulator was investigating disclosures regarding theeffect of falling commodity prices on the company’s balance sheet.RESOLUTIONThe D&O insurer’s dedicated claims specialist met with the directors prior to the interviews to discuss theinvestigation and appointment of counsel. Counsel were appointed from Insurer’s panel at discountedrates.Counsel met with the insured persons prior to the interviews and attended the interviews with them. Theinsured persons were able to adequately answer all concerns and the investigation ceased after theinterviews.D&O Insurer paid $30,000 in Investigation Costs in excess of the deductible.J B Boda 15
  16. 16. Real Claim ExamplesIndustry Public listed CompanyCoverage Section Directors’ & Officers’ LiabilityCause of Action InvestigationType of Organisation TelecomNumber of Employees More than a thousandRevenue NADESCRIPTION OF EVENTA large publically listed company based in Philippines, held a management meeting in Hawaii and flownkey executives to attend same. After meeting was over, US Federal Communication Commission initiatedinvestigation in relation to possible violation of anti-trust law.RESOLUTIONKey executives of the company had to defend themselves in US district court in Hawaii. The companycame out clean but incurred legal cost in excess of USD 4 million during the whole episode.J B Boda 16
  17. 17. Real Claim ExamplesIndustry Private CompanyCoverage Section Directors’ & Officers’ LiabilityCause of Action Breach of Child Labour LawsType of Organisation RetailerNumber of Employees 11Revenue $250,000DESCRIPTION OF EVENTThe insured owned and operated a number of newsagencies. The insured employed a number of part-time staff, which included several teenage school students.The insured was investigated and subsequently charged with various breaches of child labour laws,including a failure to obtain the consent of the teenagers’ parents to their employment.RESOLUTIONThe insured was fined $15,000 and incurred legal costs of $18,000. The fines and costs were covered bythe policy.J B Boda 17
  18. 18. Real Claim ExamplesChina Aviation Oil (Singapore) Corporation LtdChina Aviation Oil, a Chinese Govt owned company listed in the SingaporeExchange suffered US$550 million in losses from speculative oil derivativestrading. The losses came to light after China Aviation Oil filed for court protectionagainst its creditors in November 2004. CEO was arrested.Investigation was undertaken by the Commercial Affairs Department (CAD).In January 2005, Class Action law suit filed in the US by US investors..J B Boda 18
  19. 19. D&O Claims – In India Regulatory Claims  SEBI fined Reliance Industries (RIL) in a case related to violation of Sebi’s takeover regulations with respect to RIL’s holding in cement and engineering major L&T. D&O policy doesn’t pay fines and penalty but investigation cost related to such claims can be substantial and this can be covered under D&O policy. Shareholder’s Claims  A public interest litigation was filed by a JPIL shareholder alleging violation of takeover code by the company. The shareholder has alleged that during 1999- 2000, the promoters of JPIL, Jaiprakash Gaur and his associates, had acquired 10% of JPIL shares in 12 months without making a public offer. This is in violation of the SEBI takeover code which allows creeping acquisition only up to 5 per cent during any 12 months.J B Boda 19
  20. 20. D&O Claims – In India Business Partner’s Claim  ICICI Bank lodged a claim under their D&O policy for INR 250 million as an outcome of an ongoing legal battle initiated by Commerzbank. The case is related to funding of the Arvind Mills by ICICI Bank. Commerzbank which was also part of the consortium had objections to this funding. The claim filed under D&O policy for recovery of legal expenses.• Employment Practice Related Claim An ex-employee of Infosys in US filed a Sexual Harassment case against the Company and its former Director . The case was settled out of Court for US$3 MN. D&O underwriters paid for the Director’s Damages and the defence costs.J B Boda 20
  21. 21. D&O Claims – In India Ex-Director’s Claims on Subhiksha Case Premji Invest, a private equity fund owned by Azim Premji, the billionaire chairman of Wipro Ltd, admitted that they were taken for a ride on Subhiksha. Investment banking sources said the private equity firm was understood to have said it was misled on the true financial position of Subhiksha, which has prompted it to send notices to the other directors on Subhiksha’s board.• Coca Cola Sexual Harassment Claim Miss Universe and film star Sushmita Sen alleged that she was sexually harassed by the marketing head of Coca-Cola India. Sen made the allegation soon after Coca-Cola terminated its celebrity engagement contract with her. She alleged this was being done because she had rejected the sexual overtures of a senior Coke official. Sen’s lawyers also claimed sum of INR 14.5 million by way of compensation for sexual harassment should be paid by way of charity to an orphanage of our client’s choice. The sum has since been paid by Coke.J B Boda 21
  22. 22. D&O InsuranceIssues & Key Consideration J B Boda 22
  23. 23. Role of Senior Managers In todays volatile market conditions, adequate D&O cover for senior managers is essential Regulators and politicians are now holding individuals accountable, so Directors are more acutely aware of their personal vulnerability As a result, directors and other executives are more sensitive to risk than they were in the past Executives would do well to take stock of their personal liability D&O policy protects personal assets of individual Directors & Officers and therefore, senior managers must step in to make sure that their employer purchase effective coverageJ B Boda 23
  24. 24. Key Issues to Consider How much protection do I need? Cover is for EACH Director : Limit for Non-Executive Director Defense cost issues Understand the “fraud & dishonesty” exclusion What happens when Directors or Officers leave the company or retire? Pricing - this is a case of balancing a number of factors.J B Boda 24
  25. 25. Key Issues to Consider……continue Severability in the Application (Full/partial) Cancellation provision of policy? Run-off cover in the event of M&A? Insolvency issues? Erosion of policy limit by claim under Entity section ………many more D&O Policy is a tailor-made & All policies are not sameJ B Boda 25
  26. 26. ThanksRam GargDID: +65-6309 1158Mbile: +65-8322 9962E-mail: ram@jbboda.com.sg J B Boda 26

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