With directors and officials getting either arraigned or probed by investigating agencies in cases relating to loans extended, among others, to the defunct Kingfisher Airlines, and companies run by the uncle-nephew duo Mehul Choksi-Nirav Modi and Rotomac Pens, banks are seeking to ramp up cover under the Directors & Officers (D&O) liability insurance to almost five times the current level.
Zooming claims
Bankers underscored that legal expenses incurred for engaging lawyers to defend serving/ retired officials and present/ former directors are going up in those cases. Hence, the need for enhanced D&O cover.
A senior public sector bank official said his bank is planning to increase its D&O cover five-fold to ₹100 crore in the backdrop of instances of diversion of loans and frauds by borrowers coming to light in the banking sector.
Preliminary enquiries made by the bank with insurance companies revealed that premium rates will be bumped up as banks have started making claims.
“The premium that we paid for our current D&O cover was less than 1 per cent of the sum insured. But the general insurer we spoke to said this would go up substantially due to increase in the number of cases that bank officials and directors have got embroiled in vis-a-vis loans turning bad,” explained the bank official. According to the International Risk Management Institute, D&O liability insurance provides cover to directors and officers for claims made against them while serving on a board of directors and/or as an officer.
In effect, the policies function as “management errors and omissions liability insurance”, covering claims resulting from managerial decisions that have adverse financial consequences.
Quid pro quo allegations
A public sector general insurance company official said conflict of interest and quid pro quo allegations in sanctioning of loans against the chief of a large private sector bank would weigh on the D&O premium for the banking sector.