Corporate top brass scrambles for cover

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.

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.

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.

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.