Independent directors ask for insurance cover prior to appointment
Independent directors, who have been under the lens, are now putting D&O as a pre-condition for joining the board of an organisation.
A Maharashtra-based engineering firm faced a difficult situation recently, right before its board meeting to reappoint three independent directors. One of the directors stated that he would not consider the re-appointment unless the company bought a Directors and Officers (D&O) liability policy for him and the rest of the board members.
While D&O insurance covers are mandatory as per the Companies Act 2013, not many companies have actually gone about buying it.
“These three directors threatened to quit,” said the chief executive of a Mumbai-based insurance broker. “Now the company, like many others, is being forced to buy D&O,” he added.
The demand is understandable. In the recent past, in cases like IL&FS debt crisis and the PMC Bank scam, the role of independent directors has been under regulatory watch, with some of the directors being probed for their actions/in-actions. A cover, will help them meet the costs.
What is a D&O policy?
A D&O policy covers the liability incurred by acts of omission and commission by top management of companies. This includes independent directors and all other members of the board. Any personal liability due to a criminal or civil case filed against the top management is also covered by the D&O cover.
The D&O cover will pay for any demand for damages against a person for civil/criminal proceedings. Further, it will also pay against any regulatory or administrative enquiry that hampers a director monetarily. Further, any public relations expense that is incurred due to an impending case is also covered by this insurance product.
The policy premium ranges between Rs 3 lakh and Rs 10 lakh, based on the sum assured of Rs 6 crore and above.
Sources said that less than 15,000 such policies have been sold by general insurance companies so far. Insurers said even among the listed entities, the size of the cover taken by majority companies is at least 40-45 percent lower than what is required.
Depending on the business as well as the location of the offices, insurers now offer specialisation based on the risks.
For instance, if you are a manufacturing firm employing 100 people in a factory set-up, the liability coverage that you will require is much higher for workmen compensation than a software firm employing engineers in an urban area
For new board appointments as well, independent directors are now seeking D&O as a pre-condition.
“A host of independent directors do not have a full-time job and hence their liabilities are much higher than the other management,” said the underwriting head at a mid-sized general insurance company.
From the April to August period, insurers sold liability covers worth Rs 1,293.15 crore, which is a 14.4 percent year-on-year increase.
The growth may further speed up, with directors now insisting for the cover.