The recent iGate-Phaneesh Murthy controversy has refocused attention on the company managements' Directors and Officers (D&O) Liability Policy, its coverage and exclusions.
A D&O liability policy is offered by several general insurers - New India Assurance, IFFCO Tokio, Tata AIG, ICICI Lombard, Raheja QBE and Bharti AXA, among others. The policy premium ranges between Rs 4 lakh and Rs 10 lakh, based on the sum assured of Rs 6 crore and above. The premium is based on the size of the company and the facilities required. If additional covers are needed for areas such as abduction and ransom, an additional premium is charged.
Subrahmanyam B, senior vice-president at Bharti AXA General Insurance, said their D&O policy excluded areas such as fraud, personal profit, insider trading, deliberately dishonest or fraudulent acts, bodily injury and property damage, prior litigation and nuclear risk. If, for example, a director is accused of insider trading, the policy will not bear the liability or litigation costs.
New India Assurance's policy doesn't cover a fraud knowingly committed. So, if a case similar to the Satyam scam emerges, the executive will not be protected. A senior claims head of a general insurance firm said this was to protect the insurer from fraudulent claims, where the intention of the director involved was to cause damage.
The D&O policy also covers the legal liability, including costs to defend any civil and criminal action against top officials. Such action could be brought by shareholders, employees, customers or even regulators. In a past case involving a lawsuit in a sexual harassment case involving Infosys, its former employee, Reka Maximovitch, and Phaneesh Murthy, the case was settled for $3 million. The insurer paid half the amount and Infosys the other half.
While claims arising from lawsuits are covered, exclusions for geographical boundaries of the suit could be made. IFFCO Tokio does not cover environmental liability & ADR claims originating from the US/Canada.
Some insurers also excluded some business categories such as banks and financial institutions from coverage. The D&O liability insurance of IFFCO Tokio does not cover banks, financial institutions, companies without a registered office in India (except for subsidiaries of an Indian insured), construction and related business, advertising and media companies, political organisations and non-government bodies under this policy.
Almost all insurance companies exclude any claim brought by majority shareholders. An official with a private general insurer said this was excluded as the risks associated were very high. Similarly, bodily harm and physical injury is excluded. If a company's top management official is found guilty of causing physical injury to an individual, he/she will not be protected from a claim. Sector experts said incidents of sexual harassment and pregnancy would not be under the exclusions, except in circumstances where there was proof of forced pregnancy or sexual abuse.
Additional riders with the D&O policy are also there. Under Tata AIG General Insurance's Kidnap Response' cover, the insurer shall not be liable to make any payment resulting directly or indirectly from kidnapping, hijacking or wrongful detention of an insured person, if he/she was kidnapped previously.
Companies said there was rising demand for D&O cover. Mukesh Kumar, head-strategic planning, HR & marketing at HDFC ERGO, said: "In the past couple of years, we have seen a growing demand for D&O insurance from Indian companies, and there has been a transition from concept selling to general awareness. Stringent regulations, complex listing requirements, increasing legal fees and a litigious environment have contributed towards an increasing demand for this policy. Our D&O book mostly includes private firms as well as some large public sector companies."
Typically, he said, Indian multinationals, listed companies and those which planned to list their securities on stock exchanges buy D&O insurance. Further, they have seen increasing demand for this policy from companies which plan acquisitions/ mergers or capital raising via the private equity route. "The D&O market is very soft at present and premiums tend to be very competitive," he said.
HDFC ERGO's D&O policy covers directors, other officials and employees against claims with respect to any actual or alleged wrongful or unfair employment practices. This broadly includes, but is not limited to termination of employment, misrepresentation, discrimination, harassment, sexual harassment, failure to employ or promote, demotion, invasion of privacy, defamation or infliction of emotional distress.
According to the Insurance Regulatory and Development Authority annual report for 2011-12, about 328,000 policies were sold under liability insurance, accounting for premiums of Rs 1,024 crore. While there was a marginal drop in the number of policies compared to 348,000 in 2010-11, the premium saw a rise compared to Rs 930 crore in 2010-11. Insurers said 25-30 per cent of liability policies were D&O liability ones.