Directors’ and officers’ covers become costlier as their liabilities rise

Indian companies are paying up to a fifth more on average toward insurance covers for their directors and top executives against liabilities from potential claims related to either bankruptcy, fraud, security lapses or perceived breach of fiduciary duties.

Tariffs on directors’ and officers’ (D&O) liability policies have risen in line with the demand for such coverage, insurance companies said, with lenders taking more borrowers to bankruptcy courts over bad debt. Fiduciary claims on staff benefit plans or security related claims from shareholders have also raised the demand for D&O policies that seek to compensate key executives against legal action.

The premium charged on D&O insurance has increased in some cases up to even Rs 3 crore, from Rs 1.5 crore on average, for sums assured in the region of Rs 5 crore to Rs 30 crore, an official at Iffco-Tokio General Insurance said, requesting anonymity. Anup Dhingra, managing director, Marsh India Insurance Brokers Pvt Ltd, said premium tariffs have already climbed up to a fifth for large D&O buyers having tie-ups with global reinsurers and could rise further as the financial ecosystem assesses the impact of the pandemic.

“There have been many recent cases of bankruptcy and financial irregularities,” said an official at SBI General Insurance. “Corporates are also keen to protect their directors if they need good talent on board. The demand (for D&O policies) has been increasing sharply.”

D&O insurance is payable to the directors and officers of a company as indemnification for losses or advancement of defence costs if an insured officer suffers a loss as a result of a legal action brought for alleged wrongful acts in their capacity as directors and officers. Such coverage can extend to defence costs arising out of criminal and regulatory investigations or trials.

New bankruptcy laws have shown, as at Essar Steel, Videocon and Dewan Housing Finance (DHFL), that promoters could lose their businesses altogether in administered insolvencies, while their directors face significantly increased liabilities.

Pandemic, Eco Stress may Raise Cost

Also, scrutiny on governance and environmental compliances and shrinking reinsurance capacity raised tariffs. Indian companies lately listing debt or equity in the US or the UK have seen costs of relevant insurance covers even double.

RC Bhargava, chairman of Maruti Suzuki and an independent director on several boards, said that it is important for corporates to provide such risk protection to directors who were discharging official responsibilities - and not in personal capacities. “Different regulatory authorities take different legal routes and ultimately leave it to the courts to decide,” said Bhargava. “And until they are proven innocent, who will bear the cost of the long legal battle directors have to face to defend their bonafide? So, every corporate is duty bound to provide such insurance to directors.”

Insurance costs for such policies are bound to rise as enforcement of regulations aimed at better governance becomes the norm, said Narayan K Seshadri, chairman of AstraZeneca India and PI Industries. “Now, directors and officers of a company are being hauled up for breaches and negligence,” said Seshadri. “This has resulted in enhanced risks, and insurance costs are bound to rise."

Covid Costs

The pandemic could further enhance director liabilities – and the premium demanded for D&O insurance. “There is usually a lag between economic downturn and D&O claims. The current pandemic and economic stress may lead to higher insolvencies, especially after the insolvency activity resumes,” said Marsh India’s Dhingra. “Large D&O buyers have global reinsurers on their program and they have seen rate increases (20% and above) to avail the limits not available in the Indian market.”

Increasing cases of fraud and bankruptcy have lately boosted demand for D&O policies, said an industry official, requesting anonymity. “Recently, a financial institution where former directors were made responsible for a financial crisis that led to a loan default made these claims," said the official.

Shiju Veetil, senior partner at IndiaLaw LLP, said risks to directors and officials of a company are now real. “The new Companies Act passed in 2013 has been made more stringent,” Veetil said. “Directors can now be prosecuted and even jailed. There are also provisions for hefty fines. So, the risks are real and greater than before. It is no surprise that premiums have increased."