Industry officials say that the policy protecting directors and CEOs from being sued by employees, regulators, shareholders or customers for actions taken during the course of duty is growing by 35% annually. This is because a spate of high-profile cases such as iGate and Satyam are making top managements aware of the risk. Officials say that there are over 300 claim notifications every year but not all of them translate into claims.
Earlier, it was only companies with US listing that were keen on this cover. However, of late, even directors on board of public sector companies are asking if the company has D&O cover. Insurers say that this has happened after a leading foreign institutional investor, The Children's Institutional Fund (TCI), threatened to sue independent directors of Coal India for not protecting shareholder interest. In the telecom scam too, top executives were summoned and described by the court as an alter ego of their respective companies and said that the acts of the company could be attributed and imputed to the executives.
While many of the claim notifications are because of regulatory activism, there are also a large number of cases that come under employment-related practices liability. Most employers are now highly sensitized about pregnancy-related sackings, but there is an increased awareness among employees of their legal options. This is particularly true in the case of senior executives who have been deployed overseas in countries like the US."Some high-profile cases have brought into focus that the personal assets of independent directors can come into jeopardy for their action or inaction as directors. As a result, many directors had quit," said TA Ramalingam, head of underwriting at Bajaj Allianz General Insurance. Strangely, the cover has not risen because after the Tsunami in Japan and floods in Thailand several reinsurers had decided to diversify their portfolio and increase the share of liability cover. Companies can even now get cover for up to $1million for equivalent of $1,000.
Some instances where directors faced liability include a case in Bangalore where the CEO of a tech company was prosecuted by the courts after a cab driver contracted by the company raped and murdered a female employee. Some years back, a large soft drinks company was forced to settle with a former beauty queen for Rs 1.45 crore over an alleged sexual harassment case against a senior executive.
According to Ramalingam, companies with overseas exposures buy covers up to $100 million, banks typically go for $25-30 million covers while small companies may settle for $2-5 million liability covers. "Penalties on companies are generally excluded. Insurers are reluctant because even a fine for not paying sales tax can be claimed as a penalty. However, fines on individuals are covered," said Ramalingam.
The claims that come into public domain under D&O policies are only tip of the iceberg. Even where insurers settle the claim, the presence of the cover if a deeply guarded secret. The reason behind this secrecy is the fear of a deep-pocket syndrome, which results in bigger lawsuits when claimants realize there is an insurance company standing behind.
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