BANKRUPTCY: COMPANIES BUYING MORE AND MORE INSURANCE FOR DIRECTORS & OFFICERS AMID RISING BANKRUPTCY, FRAUD CASES – THE ECONOMIC TIME
Companies are buying increased insurance to cover liabilities of directors and officers – known as D&O – after the recent growth in the number of such claims in bankruptcy and financial fraud cases.
While action taken by the Central Bureau of Investigation per se does not trigger D&O cover, it is invoked when the matter goes to court. Such insurance policies pay legal claims arising due to breach of duty. They indemnify the corporation, its directors and officers against wrongful actions that cause financial harm to a third party and result in a lawsuit.
“With increased number of cases, companies are opting for increased coverage for legal expenses — to get adequate cover to defend,” said an insurance company executive. “We have seen companies double coverage in the aftermath of recent cases.”
It’s been a season of crackdowns by CBI on senior bankers. Last week, the agency named ICICI Bank’s former chief executive Chanda Kochhar as an “accused” in the Videocon loan case. Last year, Usha Ananthasubramanian, former chief executive of Punjab National BankNSE -0.65 %, was charged by CBI in connection with an alleged Rs 14,000-crore fraud through fake letters of undertaking. RP Marathe, former managing director of Bank of Maharashtra, was arrested by the Pune police last year.
“Coverage is a function of who wants to defend what, but increased number of instances have forced companies to buy higher cover,” said an insurance broker.
Company directors liable for their own and fellow-directors’ decisions can face financial loss through litigation from shareholders, creditors, competitors, suppliers or regulatory bodies. Under such circumstances, the D&O policy provides security to the directors.
There are two parts of the D&O policy covering breach of duty, neglect, misstatements or errors – one for the entity and its employees and the other for directors.
The policy does not pay for claims when a person is personally culpable. In case of Satyam Computer Services, the insurance policy did not pay the defence cost of B Ramalinga Raju and financial chief Vadlamani Srinivas because it was outright fraud.
Last month, nine former directors of Infrastructure Leasing and Financial Services (IL&FS) were named in a petition by the government as decision makers, “controlling will and mind” for most other group companies and responsible for the crisis that followed a loan default.
Under the new Companies Act, all listed companies are required to have a D&O policy. After the Satyam case, companies made a dash to cover their directors. Also, independent directors have started asking for appropriate cover to join as board members.