Insurance Policies for Risk Management, Statutory requirement or Contractual obligation

Directors and Officers insurance - D&O policy

Insurance for directors and officers responsibility under new companies act 2013
Directors and top managers are running for cover, literally. Ever since the new Companies Act kicked in, on April 1, corporate top brass has been in a hurry to insure itself against lawsuits in case it gets embroiled in allegations of fraud or mismanagement.
Directors and Officers (D&O) Liability policies, which offer cover against personal liabilities arising from the insured's corporate role, are seeing brisk business.
"We have seen a significant uptick in D&O policy sales ever since the new sections were notified in November. Companies, which have taken this policy, are increasing their cover," says Sushant Sarin, Senior Vice-President – Commercial Lines, Tata AIG General Insurance. The number of policies sold has grown by 25-30 per cent this year, and after the notification of the new Companies Act, this number is only going to go up, he adds.
Rising risk
The new company law sets stiff penalties for auditors, directors and top managers if the company they work for is accused of fraud or mismanagement. "Penalties, which were in hundreds and thousands of rupees, now run into lakhs," says Jamil Khatri, Global Head of Accounting Advisory Services, KPMG.
While a D&O policy does not offer directors/officers cover against fraud committed by them, it covers them against damages and costs arising out of legal action owing to errors, omissions or negligence in performing their managerial duties. Key managers and companies are buying these policies, as the latter too can face legal action by shareholders/employees.
"The Satyam case was really the inflection point for these policies. But, yes, there is now much greater interest. 
"We see big potential in D&O," says Amarnath Ananthanarayanan, CEO of Bharti AXA General Insurance.
Class-action suits
Companies are really worried with the provision that allows shareholders to file class-action suits. "Some of the largest claims under the D&O policy outside India have originated from class-action suits. This is thus one of the most significant risk areas where the D&O policy may come into action," says Sanjay Datta, Chief – Underwriting and Claims, ICICI Lombard General Insurance. About 5,000 such policies are in force today.
Big takers
So, which companies are off the block? Sarin says listed companies, particularly from new age sectors such as IT, entertainment, communications and biotech, opt for a higher cover as their stock price is more volatile than, say, a manufacturing company.
"In case of related party transactions, the audit committee will now need to make an assessment whether they are at an arm's length basis and in the ordinary course of business.
"Thus, companies with complex structures, multiple businesses, operating from many locations. and conglomerates may focus more on D&O insurance," says Khatri. The sum assured on such policies starts from ₹1 crore going up to ₹500 crore. Premiums vary from ₹50,000 to ₹l lakh for the minimum cover to about ₹2-3 crore for larger policies. "While limits vary from industry to industry, companies tend to take 10-20 per cent of their turnover as cover. The base (premium) rate comes to around 0.2 per cent, and again it depends on the kind of risk and industry," says Datta. 
Notable features of our new Directors and Officers Insurance form in line with the Companies Act 2013:

Section 197 (13) of CA 2013 says where any insurance is taken by a company on behalf of its defined categories of persons for indemnifying any of  them against any liability  in respect of any of the defined wrongful acts including breach of trust , the premium is not treated as part of their managerial remuneration.
  • Wrongful act under the directors and officers insurance policy should be broad enough to capture the same. So directors and officers insurance policy should not have explicit criminal breach of law exclusionWritten finding of a regulator should not be considered for applying fraud/dishonesty exclusion.
Section 177 (9) talks about vigil mechanism to report genuine concerns by employees and it casts duties on them.
  • Insured person definition under the directors and officers insurance policy should be wide enough to cover all employees. It should be broad enough to cover those persons who are not directors or employees in the eyes of law but officer in default such as de facto directors and persons who give consent to become directors by signing offer documents.
Section 2 (87) defines subsidiary and one of the conditions is to hold more than 50% of total share capital.
  • It is better to have a directors and officers insurance policy where subsidiary condition is to maintain more than 50% of the equity share capital.
Section 201 under earlier companies act or similar provision is not there under the CA 2013.
  • Retention proviso under the directors and officers insurance policy should buy back the deductible after 30 days if the company refuses to indemnify the insured persons.
Section 168 provides the directors an option to resign.
  • Directors and officers insurance policy shall extend the discovery period for life time even for resigned directors explicitly along with retired directors and officers

Wording of D&O policy comes with some important and highly distinctive features in case of HDFC ERGO as following:

No avoidance or rescission for misrepresentation or non-disclosure – HDFC ERGO has
expressly waived its rights to avoid the policy or exercise any other rights available to it in the
event of misrepresentation or non-disclosure in the proposal form. However, those Insureds who
knew the true position with regard to the facts or matters misrepresented or knew any of the nondisclosed facts will not have the benefit of coverage.

Newly acquired companies – we have increased the threshold for newly acquired companies to
25% of the assets of the company; acquisitions whose assets exceed 25% of the company’s
assets must be reported to HDFC ERGO.

Cover for Insured v Insured claims – the full policy limit is available for claims brought outside
the USA unless they are Consensual Claims. Where a claim is brought in the USA cover is
available for: derivative actions (including whistle-blower actions pursuant to Sarbanes-Oxley),
claims by past insured persons, employment claims, claims for contribution or indemnification
and defense costs.

Broad Claims Definition – extended to include Extradition proceedings providing defence costs
up to the full policy limit irrespective of the countries involved.

Broad Director and Officer definitions - broad definition including de facto, alternate and
shadow directors. Individuals occupying comparable positions in any other jurisdiction are also
expressly covered.

Deductible funding - if the company is not prevented from reimbursing an insured person, but
refuses to do so, HDFC ERGO will fund the deductible and recover it from the company.

Broad definition of Employment Claim - expressly includes retaliatory treatment arising from
an employee exercising his or her rights under any whistle blowing law anywhere in the world.

Loss definition includes punitive, exemplary or aggravated damages – provided that HDFC
ERGO is not legally prohibited from paying such damages in the jurisdiction in which the claim is

Outside Directorship Liability – extends to any qualifying outside entity on an automatic basis
otherwise cover can be provided with HDFC ERGO’s consent.

Insured Person – includes a director or officer, an employee (for EPL claims; where they act in a
managerial or supervisory capacity; hold an outside directorship position or where they are
named as co-defendants along with any directors or officers) and a director of a corporate trustee
or policy committee member of any superannuation fund or pension plan established for the
benefit of their company’s employees.

Subsidiary – includes incorporated joint ventures or companies over which the company has
effective management and control.

Retired Directors and Officers – in the event that the policy is terminated or non renewed and
provided that no ‘event’ has occurred, directors and officers who have retired prior to the expiry of
the policy period will be covered for 7 years at no extra charge.

Emergency Defence Costs – defence costs and legal representation expenses can be incurred
for up to 30 days without HDFC ERGO’s prior written consent where such consent cannot be
requested due to an emergency.

Dishonesty Exclusion – does not apply to HDFC ERGO’s obligation to advance Defence Costs
or Legal Representation Expenses until a final adjudication in any proceedings establishes a
deliberately fraudulent act, omission or wilful violation or breach. Admissions by insured persons
no longer trigger the exclusion. Also expressly provide that final adjudication is only satisfied in
the underlying claim against the insured and not in any declaratory proceeding brought by HDFC

Full Severability of Exclusions – With respect to the dishonesty exclusion, facts pertaining to or
knowledge possessed by one insured person shall not be imputed to another insured person and
only facts pertaining to and knowledge possessed by certain key individuals of the company will
be imputed to it.

Priority of Payments – where a Loss exceeds the available limit of liability, priority will be given
to the payment of loss that falls within the directors and officers insuring clause.

Notification of Circumstances – the Insured may notify any circumstances which could give
rise to a claim. If any claims arise from such circumstance then they shall be considered to have
been made during the policy period in which the circumstance was initially reported.

Acquisition of Company – In the event of the acquisition of the company an extended reporting
period of up to 7 years is available.

Advancement of Defence Costs & Legal Representation Expenses – within 30 days of receipt
of defence counsel’s invoice.

Occupational Health & Safety Defence Costs – full policy limit available for Defence Costs and

Legal Representation Expenses incurred in the defence of an OH&S claim. Specific reference to
workplace fraud and manslaughter law anywhere in the world.

Pollution Defence Costs – sub limit available for defence costs incurred in defending a claim
resulting from pollution by the company.

Shareholder Pollution Actions - full policy limit available for claims by shareholders resulting from
pollution by the company.

Dedicated Additional Limit of Liability for Director and Officers – a discrete, additional limit
available to directors and officers in addition to the limit of the policy. The additional limit is in
addition to the policy limit and is not eroded by the payment of claims within the policy limit.

Bilateral Extended Reporting Period – 90 days cover provided for no additional premium and
365 days cover in addition to the automatic 90 day period provided for 50% of the annual premium.

Spouses, Heirs & Representatives – if named in a claim, are covered for wrongful acts of a
director or officer as if they were the director or officer.

Continuity of Cover- covers claims or circumstances which could or should have been notified
under a prior policy where HDFC ERGO was the insurer. Coverage shall be in accordance with the
terms and conditions of the policy in effect at the time that the claim or circumstance should have
been notified.

No Enforced Settlement or Hammer Clause

No Senior Counsel or Queens Counsel Clause

No Bankruptcy or Insolvency Exclusion
In executive protection, HDFC ERGO is the acknowledged leader. We consistently provide
enterprises with innovative specialty insurance products, superior service, unparalleled underwriting expertise, and an unflinching commitment to fair and prompt claims handling.

Some of the statutes under which Directors and Officers can be held liable

S. No.
Companies Act 1956
Prevention of Food Adulteration Act 1954
Standards of Weights and Measures Act 1976
§50 to §74
Child Labour (Prohibition and Regulation) Act
§ 14
Negotiable Instruments Acts, 1881
§138 read with §141
Water Prevention and Control of Pollution) Act 1974
§42 read with §47
Environment (Protection) Act 1986
§ 15 and §16
Wildlife Protection Act 1972
§ 51 read with §58
Foreign Contributions (Regulation) Act 1976
§ 26
Securitisation Act 1960
Bonded Labour system (Abolition) Act 1976
Air (Prevention and Control of Pollution) Act 1981
§38 read with §40
Building and other Construction Workers Welfare Cess Act
§12 and §13
Foreign Exchange Management Act 1999
Cable Television Networks (Regulation) Act 1995
Information Technology Act 2000
The Depositories Act 1996
Drugs and cosmetics Act 1940
Drugs and Magic Remedies (Objectionable Advertisements) Act 1954
The Drugs (Control) Act 1950
The Transplantation of Human Organs Act 1994
Payment of Bonus Act 1965
§28 and §29
Payment of Gratuity Act1972
Payment of Wages Act 1936
The Workmen's Compensation Act 1923
The Industrial Employment Standing Order Act 1946
The Maternity Benefit Act 1961
§21 and §22
The Minimum Wages Act 1948
§22 and §22C
The Motor Transport Workers Act 1961
§29 to §35
The Industrial Disputes Act 1947
§26 to §31 and §32
The Apprentices Act 1961

The Contract Labour Act 1970
§22 to §25
The Employees’ Provident Funds and Miscellaneous Provisions Act 1952.
§14 and §14A
The Employees’ State Insurance Act 1948
§85, §85A and §86A
The Factories Act 1948
§92 to §96A
Securities and Exchange Board of India Act 1992
§24 and §15A to §15AJ
The Insecticides Act 1968
§29, §33
The Income Tax Act 1961
§270 to §273 read with §278B

Workmen's compensation Insurance policy - This is usually insisted as one of the conditions on the contractor to whom work is allotted

The Indian Workmen's Compensation Act 1923 provides for the payment of compensation by the employer to his employees (for their dependents in the event of fatal accidents) if
personal injury is caused to them by accidents arising out of and in the course of their employment.

The Workmen’s Compensation policy covers the liability of an employer for employment injury (including death) sustained by any employee who is a ‘workman’ as defined under
Workmen Compensation Act.

It also covers liability in respect of diseases mentioned in Part C / schedule III of WC Act, on additional premium; which arise out of and in the course of employment.

The policy can also cover medical, surgical, and hospital expenses including the cost of transport to hospital for accidental employment injuries, on payment of extra premium.

The policy does not have a Sum Insured but the estimated “Earnings” of the workmen for the policy period is mentioned on the policy. The Premium rate depends on the occupation
of the workmen and his/her annual “Earnings”

The maximum compensation payable is upon the following scale (as per W.C. Amendment Act 2000) 
• Fatal Injury - Rs.4, 57,080
• Permanent Total Disablement - Rs.5, 48,496
• Permanent Partial Disablement - According to incapacity caused
• Temporary Disablement - Rs. 2000 per month upto a period of 5 years

Insurances to be considered

Coverage of Liabilities - Acord Form