2. 2
Disclaimer
This presentation is provided solely for general
information purposes and the information contained
herein does not purport to be a complete description
of all terms, exclusions and conditions applicable to
the insurance agreement. It should not be relied upon
to decide if a claim is payable under the policy or not.
3. 3
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”
The Economist
4. 4
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 own
5. 5
Who are the duties owed to?
Firstly to the shareholders
The Company itself and minority shareholders.
Creditors - allegations of wrongful trading can be made in
the event of insolvency.
Employees including employment issues – unfair
dismissal/discrimination etc.
Other companies - disposals and acquisitions.
Regulatory authorities e.g. health and safety issues
6. 6
Legal liabilities of Directors & Officers
Regulators in Asia are more
active and focusing on;
– Transparency and disclosure
– Financial reporting
– Board practice
All above factors deriving greater expectation
of best corporate governance practice
7. 7
What is D&O Insurance?
D&O Insurance provides indemnity for the
Individual Directors and Officers of a
company against their legal liability to pay
damages to third party claimants as a
consequence of the third party having
suffered financial loss through the
negligent act, error or omission of the
Director or Officer in his/her “managerial
capacity”.
In other words, it is a “Managerial
Negligence” cover
8. 8
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&Os
9. 9
D&O Insurance – D&O Policy Trigger
Wrongful Act by an Insured Person
whilst acting in his Managerial
capacity
Claim against Insured
Person
LOSS
10. 10
D&O Insurance – Loss
DAMAGES
DEFINITION OF LOSS
SETTLEMENTS DEFENSE COST PLAINTIFFS
COST
Loss excludes fines or penalties imposed by
law and punitive, aggravated or exemplary
damages.
11. 11
D&O Insurance – Insuring Clauses
Two Main Insuring Clauses
Insuring Clause 1 (Directors’ and Officers’ Liability Coverage) –
pays on behalf of the Insured Person where he/she is unable to
receive indemnity from the Company
Insuring Clause 2 (Company Reimbursement Coverage) - pays
on behalf of the Company where it is legally permitted or required
to provide indemnity to the Insured Person
12. 12
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?
Insurers advance Costs and
Expenses to the D&O’s under the
D&O Section of the Policy
The Company advances Costs and
Expenses to the D&O’s
The Company recovers their outlay under
the Company Reimbursement Section
EXCESS OF THE DEDUCTIBLE
No Yes
13. 13
D&O Insurance - Structure
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?
Insurers indemnify the D&O’s under
the D&O Section of the Policy
Insurers indemnify the Company under
the Company Reimbursement
Section
EXCESS OF THE DEDUCTIBLE
No Yes
15. 15
D&O Insurance – Side C (Entity Section)
Who is at risk?
What is at risk?
Cover?
16. 16
D&O Insurance – Claims Made basis
• D&O Policies are insured on a Claims Made basis.
• Responds only to Claims first made against Insured
during the Policy Period.
• Policy allows circumstances which may lead to
future Claims to be reported during the Policy
Period. Known as “locking in”.
• Known Claims or circumstances before policy
incepted are excluded.
17. 17
D&O Insurance – Retroactive Cover
• The Policy will only respond to Claims made during
the Policy Period arising from Wrongful Acts
committed on or after the Retroactive Date.
• For Full Retroactive Cover, the Policy will respond in
respect of Wrongful Acts committed since
commencement of business.
• Subject to Known Claims, Circumstances and Prior &
Pending Litigation exclusion.
21. 21
D&O – Information Requirement
The following is minimum requirement;
Completed Proposal Form (Must include Claim info)
Latest audited financials
22. 22
What you’re really underwriting
when you underwrite D&O is
you’re underwriting the people.
You’re underwriting the senior
management, the quality of the
management team.
Underwriting Considerations
23. 23
Underwriting considerations include:-
a) Domicile and international activity (especially US exposure)
b) Claims record
c) Industry sector (for example: financial institutions are considered
higher risk)
d) Stock exchange listing
e) Market capitalization
f) M&A activity
g) Professional CVs of the management
D&O Underwriting Considerations
24. 24
D&O Underwriting Considerations
Report and accounts - key documents:
– chairman’s statement – insight into future strategy
– directors report –statutory requirement
– auditors report – ‘true and fair view’
– profit / loss account – what has been happening
– balance sheet – snapshot of assets and liabilities
– notes to the accounts / contingent liabilities e.g. in dispute with the
Inland Revenue. Provisions in the accounts for bad debts.
25. 25
D&O Underwriting - Understanding the Company
& Management
What is the company all about?
Business - wide or specific?
Local, Regional or International player?
Is it a leader or a follower in the market?
What are the analysts saying about the company?
What is the Chairman saying?
Litigation environment?
26. 26
D&O Underwriting - Understanding the Financials
Are the revenues declining?
How is the company performing relative to peers?
Are the margins thin?
Profitable? How long for? Have they ever been?
Gearing Levels, Long Term Debt to Equity Ratios.
– is this in line with peers?
– Some industry we know carry higher LTD/equity such as
Manufacturing company
Cash Flow – operating cash flow
Are they likely to go public soon / private offerings?
27. 27
D&O Underwriting – Premium Rating Process
(Hypothetical)
Establish a basic rate for INR 10 mln limit – for example INR 250,000/-
Example
Base Rate
Asset Size below Asset Size between
INR 1 bln INR 1 bln to 10 bln
Limit Premium Limit Premium
10,000,000 250,000 10,000,000 325,000
100,000,000 500,000 100,000,000 650,000
300,000,000 800,000 300,000,000 1,040,000
650,000,000 1,000,000 650,000,000 1,300,000
28. 28
D&O Underwriting – Premium Rating Process
(Hypothetical)
The following factors are examples of the issues that have a specific
impact on the rating of D&O insurance premium by underwriters.
Financial Features Range
– Credit rating and volatility -10% to +10%
– Share price volatility and market capitalization -5% to +5%
– Mutual or private company -25% to -15%
– Bond or share issue planned +10% to +30%
Management Features
– Rapid growth of the company +10% to +40%
– Recent major merger or restructuring +30% to +55%
– Divestments in hand +5% to +25%
– Board reputation and profile -10% to +10%
– Asset distribution -5% to +10%
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D&O Underwriting – Premium Rating Process
(Hypothetical)
Reputational Features
– Brand profile and quality -10% to +10%
– D&O claims history -20% to +20%
– Customer and supplier dependency 0% to +10%
– Business diversity and diversification -10% to +15%
Marketplace Features
– Trend, stability and types of the business -10% to +40%
– Regulatory changes anticipated 0% to +10%
– Specific exclusions imposed -40% to -10%
– Specific extensions required +5% to +30%
– Entity coverage +10% to +30%
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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
32. 32
Common types of claims
a) Shareholders: mismanagement, decline in investments,
performance of the company,
misrepresentation in offering documents, bad
investment decisions
b) Employees: employment practices claims such as
discrimination, harassment, libel and slander,
improper working conditions
c) Investors: misrepresentation and misleading information
d) Competitors: unfair business practice, libel and slander
e) Regulators: breach of statutory provisions, market
misconduct
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D&O Claim by Regulators
1. Market Misconduct:
(a) Insider trading
(b) Price rigging
(c) False trading
(d) Market manipulation
(e) Disclosure of false and misleading information
2. Directors breaches of Statutory Duties
34. 34
Larger Sources of Claims
Trading Losses
Accounting Irregularities
Mergers, Acquisitions and Divestments
Share Issues
Change in Control or Shareholdings
Employment Practices Liability (EPL) Issues
35. 35
Real Claim Examples
DESCRIPTION OF EVENT
The Financial Regulator ('The Regulator') issued notices to attend interviews to four directors and officers
of the insured minerals processing company. The Regulator was investigating disclosures regarding the
effect of falling commodity prices on the company’s balance sheet.
RESOLUTION
The D&O insurer’s dedicated claims specialist met with the directors prior to the interviews to discuss the
investigation and appointment of counsel. Counsel were appointed from Insurer’s panel at discounted
rates.
Counsel met with the insured persons prior to the interviews and attended the interviews with them. The
insured persons were able to adequately answer all concerns and the investigation ceased after the
interviews.
D&O Insurer paid $30,000 in Investigation Costs in excess of the deductible.
Industry Public Company
Coverage Section Directors’ & Officers’ Liability
Cause of Action Investigation
Type of Organisation Minerals Processing
Number of Employees 112
Revenue $25 million
36. 36
Real Claim Examples
DESCRIPTION OF EVENT
A large publically listed company based in Philippines, held a management meeting in Hawaii and flown
key executives to attend same. After meeting was over, US Federal Communication Commission initiated
investigation in relation to possible violation of anti-trust law.
RESOLUTION
Key executives of the company had to defend themselves in US district court in Hawaii. The company
came out clean but incurred legal cost in excess of USD 4 million during the whole episode.
Industry Public listed Company
Coverage Section Directors’ & Officers’ Liability
Cause of Action Investigation
Type of Organisation Telecom
Number of Employees More than a thousand
Revenue NA
37. 37
Real Claim Examples
Industry Private Company
Coverage Section Directors’ & Officers’ Liability
Cause of Action Breach of Child Labour Laws
Type of Organisation Retailer
Number of Employees 11
Revenue $250,000
DESCRIPTION OF EVENT
The 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.
RESOLUTION
The insured was fined $15,000 and incurred legal costs of $18,000. The fines and costs were covered by
the policy.
