Running for cover
Demand for D&O policies on the rise as India Inc looks to protect its brass
“The IBC, GST regime and Whistleblowers’ Protection Act, and generally stricter laws, have enhanced managerial risk”
SUSHANT SARIN Executive vice-president, Tata AIG General Insurance “Given the local capacity and no major claim activities, the product is thinly priced. But we foresee some correction”
VAIDYANATH BALASUBRAMANIAN Underwriting manager, SBI General Insurance
Demand for Directors and Officers (D&O) insurance is on the rise as corporate India seeks to barricade its brass from the increasing number of corporate frauds and bankruptcyrelated concerns. Vendors of D&O covers are seeing an annual growth of between 20 per cent and 30 per cent for these offerings.
“The coming into force of the Insolvency and Bankruptcy Code, the goods and services tax (GST), and Whistleblowers’ Protection Act; and better and stricter implementation of laws, in general, have increased managerial risks”, says Sushant Sarin, executive vice-president at Tata AIG General Insurance. He adds that company managements have also taken note of the Uday Kotak Committee on Corporate Governance’s proposal that the top-500 listed companies by market capitalisation take adequate D&O insurance, especially for independent directors. The Securities and Exchange Board of India (Sebi) has also mandated a D&O policy for directors for such firms with effect from October 1, 2018.
Under Section 245 of the Companies Act (2013), class-action suits can be set in motion against a company’s management and any of its directors before the National Company Law Tribunal in the event of a fraud. D&O insurance protects directors and officers from the financial consequences of claims made against them for wrongful managerial acts. The policy kicks in even for claims based on allegations which are yet to be proven. D&O policies provide for defence costs to the brass to protect themselves well against such claims. In addition, they pay for investigation costs to appear before the regulatory authorities and provide special protection to nonexecutive directors and life-time cover for retired directors. This is because while stepping down may indemnify directors from latter-day slip-ups, the person will continue to be held liable for those which occurred under their watch – this has been clarified under Section 168 (2) of the Companies Act.
“While companies having overseas exposures (be it through subsidiaries or those which are listed abroad), buy D&O covers with higher limits, domestic entities opt for a lower limit, say in the range of ~5–10 crore. However, taking a cue from global trends and increased consumer activism, we foresee some correction, especially for firms in the financial services space, pharma and those with a global presence”, says Vaidyanath Balasubramanian, underwriting manager at SBI General Insurance. While Sebi has insisted on a D&O policy, it has left it to the Boards of companies to decide on the quantum of coverage and the limits purchased.
Under the spotlight
Marsh India’s internal estimates, sometime back, noted that in many cases, the limits purchased by banks and corporates were inadequate. It had noted that in light of the recent regulations, “these (limits) would be used up quickly just to defend the allegations made, thereby effectively leaving nothing for the civil damages awarded”.
While the IT sector always had an appetite for D&O covers, in the case of other areas “while many companies may not have dealt with any directorrelated litigation as yet, with the changes to the Companies Act, they are opting for the same to avoid any additional financial burden in case of eventualities”, says Subrata Mondal, executive vice-president, underwriting, IFFCO Tokio General Insurance. The number of claim notifications for insurers, too, have increased. Earlier, it was majorly seen in the larger homegrown, or multinational companies, but now even the smaller private and unlisted entities are going in for D&O cover.
Points out Sasikumar Adidamu, chief technical officer at Bajaj Allianz General Insurance: “If a claim falls within the coverage of the policy, it starts paying for defence costs from day one and continues to do so until final adjudication or court judgment up to the aggregate limit of indemnity offered under the policy”. When it comes to pricing the product, premiums generally vary across industries – it depends on potential liabilities. And the financials of the company are also factored in.
The size of insurance coverage and policy limits in the banking sector vary significantly between state-run and private banks. It would be interesting to see how state-run banks move on the D&O cover front in the days ahead as almost 95 per cent of the frauds in the sector are in these banks.
The latest Reserve Bank of India’s systemic data on frauds in its Financial Stability Report (FSR: December 2019) shows “outlier ” frauds – defined as those exceeding ~1,000 crore — shot up to ~44,951 involving 22 cases in the first half of FY20, up sharply from the~6,505 in four cases in FY19. The FSR also mentioned that the top 10 frauds by value accounted for 69.2 per cent of the total amount involved in the “outlier ” cases.