MF

MFS-302

DIRECTORS AND OFFICERS LIABILITY INSURANCE

2011

NALSAR-IIRM

INDEX 1. ROAD MAP AND DRAFT 2. INTRODUCTION 3. DIRECTORSS AND OFFICERS LIABILITY INSURANCE 4. DIRECTORS 5. LEGAL AND ECONOMIC PRINCIPLE 6. BASIC COVERAGES 7. EXTENSIONS AVAILABLE AND NEEDED 8. CASE STUDIES 9. CONCLUSION 10. BIBLIOGRAPHY

ROAD MAP AND DRAFT SCOPE OF COVER AVAILABLE AND TYPES OF COVER AVAILABLE (Basic Study) The Scope of cover available is always clearly understood when first there is clarity on the target group whom to the Insurance cover serves. Who this Indemnity can be issued to is: Directors & Officers of the Company Former, Present and Future Directors of the Company Employees working in a Managerial and supervisory capacity Directors and Offices of the Holding Company Directors and Officers of the Parent Company; Existing Subsidiaries and Representation in Associate Companies.

What are the components that need cover? Directors and Officers Legal Liability Company Reimbursement Defence costs

A basic idea of the scope of cover available would be from a peripheral study of the following Agreements: Agreement A-Direct Cover to Directors Agreement B-Corporate Reimbursement to Directors & Officers Agreement C-Coverage for Entity Securities Agreement D-Cover for Employment Practices Liability

A bit deeper understanding would make us understand that A would provide Coverage directly to Directors and Officers for Loss and Defence Expenses from wrongful actions or decisions-

Applies where Corporation does not indemnify its Directors and Officers B would effectively mean Corporate Reimbursement this is why Companies go in for a B Agreement. In this Agreement Reimbursement is available to the Extent permissible.

(Various parameters) C is an Agreement that has achieved high Market focus as also to serve as a tool for Effective Corporate Governance. This would provide for the Losses to Investors due to violation of Security Laws, SEBI Laws and for Non compliance of Clause 49 and similar statutory controls. D is an Agreement which provides cover for Employment Practices Liability-this agreement has also achieved great importance and focus in recent times it provides against various kinds of Employment Practices violation (as viewed by the Employee and the Legal forum). The project will start from a brief description about what is D&O insurance and shall move onto to the basic types of policies available, the legal and economic principles upon which D&O insurance is based, the basic coverages and the extensions available and are needed to provide wholesome protection to the insured.

CHAPTER 1: INTRODUCTION

Risk management is an important component of corporate governance practices and efficient management of the risk that key persons in a company are exposed to is therefore vital for every company. Insurance is the best tool for risk management. The recent years have seen a lot of developments in the insurance market in terms of products and services. Directors and Officers (D&O) liability insurance is one such product which has now become an important part of management liability insurance. Globally, in most of the countries in Europe and America, majority of the large corporations maintain D&O liability insurance today. In general, the D&O liability insurance claims are more from larger companies, whether listed or unlisted, but for that matter it is erroneous to conclude that private or smaller companies and their directors are immune to such an insurance product. Even in the latter type of companies litigation possibilities are not completely ruled out and there are numerous instances of litigation between members of the family or once-upon-a time friends who mutually agreed to start a company. These apart, companies, big or small, listed or not always stand open to the risk of litigations from creditors, customers, employees, banks, vendors, competitors and other public institutions. This project mainly deals with the coverage that a D&O policy offer and also the extensions. Thus the main aim of the project at its natural conclusion should be to give a panoramic understanding of the nature of D&O insurance, its importance in the Indian Business context especially with the recent liberalization of the Indian economy and the coverage it provides and the advantage to the corporates for availing such a policy and extensions which are currently available in the market and the extensions or coverage which may be needed.

CHAPTER 2: DIRECTORS AND OFFICERS LIABILITY INSURANCE Directors and Officers Liability Insurance, often referred to as just D&O Insurance, is one type of liability insurance whose beneficiaries are the directors and key officers of a company or the company itself. The payment of this liability insurance is made in order to cover various costs of a lawsuit like damages, defence costs, lawyers fees, consequent losses etc. resulting from the wrongful acts and deeds of directors and officers of a company in their capacity as such. Such wrongful acts might be omissions, errors, misstatements, misleading statements, neglect or breach of duty by such directors or officers. Suits can be brought for various reasons by various stakeholders like the shareholders for insider trading, or shareholder derivative suits, by the creditors for misrepresentation of financial health of the company, by competitors for unfair trade practices, by consumers for defect or deficiency of product and services and by public organizations for various issues like pollution and other health hazards. Lawsuits covered may range from both civil and criminal suits to regulatory investigations and trials. The Directors of a company are bound by their fiduciary duty towards the company and the shareholders. There is a principal & agent relation between the shareholders and the directors, and the directors, as agents are bound to act in the best interest of the shareholders. In this age of corporate governance, the scope of directors duties have been enhanced so much so that in most cases the term shareholder is replaced by the term stakeholders and it is believed that the directors are bound by their duty of care not only to shareholders but also to creditors, employees, suppliers, customers and so on. They can therefore be liable for breach of contract or breach of duty, non-disclosure of interest, negligence, mismanagement of assets etc. to all stakeholders. This substantially enhances their risk. In countries like the United States, corporate law makes it mandatory for companies to indemnify their directors and key officers against risk of personal liability arising by virtue of their position in the company. The idea behind is to encourage qualified and capable people to take up these important positions in the companies and for the companies to be able to retain them. However, there are numerous situations in which the companies are not allowed to indemnify its directors or officers in which cases the D&O insurance comes in handy. Following is a brief note on the possible ways to relieve directors from liability: Ratification by shareholders: Certain breach of duty by directors can be ratified by an honest disclosure of the same in a shareholders meeting and the latter deciding to ratify the directors by passing the required resolution.

Indemnification by company: While the company cannot enter into contract with directors to exempt them from any liability arising out of negligence, fraud etc. towards company, the company can definitely indemnify directors against liability arising out of their dealings on behalf of the company with third parties.

Business Judgement Rule: Next comes the business judgment rule which the courts might apply when a suit is brought against the directors and none of the above is applicable. This is the essence of section 6331 of the Companies Act, 1956.

D&O liability insurance: When all the above fails then comes the D&O insurance cover for protecting directors.

Directors and Officers Liability insurance is commonly purchased with a companion product "Corporate Reimbursement Insurance" (or "Company Reimbursement Insurance"). When purchased together, a single insurance policy is normally issued which is entitled "Directors and Officers Liability and Company Reimbursement Insurance". Modern Directors & Officers policies now frequently include cover for the Company Entity itself as well as Employment Practice Liability. D&O insurance is usually purchased by the company itself, even when it is for the sole benefit of directors and officers. Reasons for doing so are many, but commonly would assist a company in attracting and retaining directors. Where a country's legislation prevents the company from purchasing the insurance, a premium split between the directors and the company is often done, so as to demonstrate that the directors have paid a portion of the premium.

633. Power of Court to grant relief in certain cases.(1) If in any proceeding for negligence, default, breach of duty, misfeasance or breach of trust against an officer of a company, it appears to the Court hearing the case that he is or may be liable in respect of the negligence, default, breach of duty, misfeasance or breach of trust, but that he has acted honestly and reasonably, and that having regard to all the circumstances of the case, including those connected with his appointment, he ought fairly to be excused, the Court may relieve him, either wholly or partly, from his liability on such terms as it may think fit: 1[Provided that in a criminal proceeding under this sub-section, the Court shall have no power to grant relief from any civil liability which may attach to an officer in respect of such negligence, default, breach of duty, misfeasance or breach of trust.] 2[(2) Where any such officer has reason to apprehend that any proceeding will or might be brought against him in respect of any negligence, default, breach of duty, misfeasance or breach of trust, he may apply to the High Court for relief and the High Court on such application shall have the same power to relieve him as it would have had if it had been a Court before which a proceeding against that officer for negligence, default, breach of duty, misfeasance or breach of trust had been brought under sub-section (1). (3) No Court shall grant any relief to any officer under sub-section (1) or sub-section (2) unless it has, by notice served in the manner specified by it, required the Registrar and such other person, if any, as it thinks necessary, to show cause why such relief should not be granted.]

A common misperception of D&O insurance is that it makes directors or officers able to engage in acts they know to be wrong; this is not the case. Intentional acts are not covered in D&O insurance. Only negligence by directors or officers would be covered. In a recent spate of litigation, a number of adverse court verdicts regarding the liability of directors and officers of companies to a third party were passed where the directors and officers were held personally liable for payment of compensation to the third party. Ordinarily, the directors and officers are bound by duty towards the company itself, shareholders, employees, creditors, customers, competitors, members of the public, government and other regulatory bodies. Any breach or non-performance in the duties can result in claims against the companies and/or its directors of the company by reason of any wrongful act in their respective capacity. The Directors' and Officers' Liability Insurance policy has been designed specifically to meet any financial liabilities imposed upon them. This policy is necessary for directors and officers of every company if they wish to avoid potential litigation owing to

Failure of supervision. Inaccuracy in statements of financial accounts. Lack of judgement and good faith. Mismanagement of funds. Mis-statements in prospectuses. Allotment of shares. Unauthorised loans or investments. Failure to obtain competitive bids. Imprudent expansion resulting in a loss. Using inside information. Unwarranted dividend payment, salaries or compensation. Misleading statements filed with the stock exchange. Misrepresentation in acquisition agreement for the purchase of another company. Wrongful dismissal of an employee.

THE MAIN EXPOSURES: Publicly Quoted Companies Subsidiaries with Outside Shareholders Joint Ventures Raising Additional Capital Mergers & Acquisitions Major Restructuring International Markets Private & Public Offerings Independent Directors on Board Opening branches/subsidiaries overseas, particularly in the USA

CHAPTER 2: DIRECTORS (WHO ARE COVERED?) MEANING OF DIRECTOR AS PER THE COMPANIES ACT, 1956: A company is a legal entity and does not have any physical existence. It can act only through natural persons to run its affairs. The person, acting on its behalf, is called Director. Section 2(13) of the Companies Act, 1956, defines a Director as any person, occupying the position of Director, by whatever name called. They are professional men, hired by the company to direct its affairs. But, they are not the servants of the company. They are rather the officers of the company. The definition of Director given in this clause is an inclusive definition. It includes any person who occupies the position of a director is known as Director whether or not designated as Director. It is not the name by which a person is called but the position he occupies and the functions and duties which he discharges that determine whether in fact he is a Director or not. The function is everything; name matters nothing. So long as a person is duly, appointed by the company to control the companys business and, authorized by the Articles to contract in the companys name and, on its behalf, he functions as a Director. The Articles of a company may, therefore, designate its Directors as governors, members of the governing council or, the board of management, or give them any other title, but so far as the law is concerned, they are simple Directors. Meaning of Liability: The word liability has two general connotations. In business law, liability refers to the responsibility for a company's debt or other obligations. Some forms of business organization, such as a sole proprietorship, have unlimited liability, meaning that the owner is personally responsible for the debts and obligations of the business, and lenders or courts may look to the owner's personal assets for payment of these obligations. Limited liability organizations, such as corporations, allow lenders and courts to only seize the assets of the business rather than the assets of the owners.

However, liability is more frequently used in an accounting sense, where the word refers to a

claim on a company's assets. Technically, a liability is a required transfer of assets or services that must occur on or by a specified date as a result of some other event that has already occurred. Why liability matters? Information about a company's liabilities is a key component of accurate financial reporting and a crucial part of thorough financial analysis. Although the Financial Accounting Standards Board, the Securities and Exchange Commission, and other regulatory bodies define how and when a company's liabilities are reported, and although liabilities make up a significant portion of the balance sheet, not all liabilities are required to appear on the balance sheet. Therefore, analysts must also carefully study the notes to a company's financial statements.

Excessive liabilities can ruin a company, but they are not always detrimental. Liabilities often represent the company's ability to defer cash outlays, allowing it to use that cash for other, possibly more profitable purposes until the obligation is due. The use of debt financing can magnify profits that would have otherwise gone unrealized. Liability of directors under the Companies Act, 1956 Position of director: The directors are the custodian of the interests of the shareholders. Their position is fiduciary vis--vis the Company. The directors must exercise their power for the benefit of the Company. There exists a relationship of a trustee and trust between the directors and the shareholders of the Company. The directors have been held trustees of the assets of the Company and in many cases the courts have directed them to reimburse the loss to the Company, where it was found that directors have applied the Company's money in payment of an improper commission. Each section also specifies the penalty to be paid in case of default, imprisonment or both. The strictness with which the courts view the responsibility and the sacredness of the trust reposed in the directors had been emphasized in many cases. Their position has further

changed in the era of Corporate Governance to the extent that the directors have to protect the interests of not only the shareholders but also other stakeholders. In this article an attempt is made to define the extent and scope of liabilities of Directors viz. Managing Director, Working Director and an ordinary Director under the Companies Act, 1956. Liabilities of Directors: The liabilities of the directors vary according to the status of the Company i.e. whether the Company is private or public. But in all cases in discharging the duties of his position, he must act honestly, carefully and without any negligence. The various liabilities of directors under the companies Act, 1956 may be summarized as under: 1. Filing of various documents with Registrar of Companies: a) Annual Return within 60 days of the annual general meeting. b) Balance Sheet within 30 days of laying the accounts at the annual general meeting. c) Return of Allotment of Shares in Form No. 2 within 30 days of Allotment of shares. d) Change in Directors / Secretary (Appointment / Re-appointment /Cessation/ Resignation etc.) in Form No. 32 within 30 days of such change. e) Registration of certain resolutions and agreements u/s 192 in Form No. 23 within 30 days of passing of such resolutions etc. f) Creation & modification of charges in Form No. 8 & 13 and Satisfaction of charges in Form No. 17 & 13, within 30 days of creation, modification and satisfaction respectively. 2. Holding of various Meetings under Companies Act, 1956: a) Board Meeting: b) Annual General Meeting c) Extra-ordinary General Meeting

3. Maintenance of Statutory Books under Companies Act, 1956: a) Minutes Book: for Board meeting and General meetings separately u/s 193. b) Register of Members: showing name, address and occupation of each member, the share held including the distinctive numbers, the amount paid on the shares etc.u/s 150/151 c) Register of interested Directors etc. : showing the required particulars u/s 301 d) Register of Directors, Managing Directors and Secretary: showing the required particulars about them etc. u/s 303 e) Register of Directors, Managing Directors and Secretary Shareholding: showing the required details about shareholding etc. u/s 307. f) Register of Charges: showing the particulars of charges on the assets of the company u/s 143. g) Register of Investments showing particulars of investment u/s 49/ 372A. h) Register of Transfer of Shares: along with details relating to the transferor and the transferee and the No. of shares transfer etc. 4. Liability for negligence 5. Standard and degree of care and skill 6. Special Statutory Protection against Liability [S.633] 7. Fiduciary Duties

CHAPTER 3: LEGAL AND ECONOMIC PRINCIPLE BEHIND DIRECTORS AND OFFICERS LIABILITY INSURANCE POLICIES

3.1. LEGAL PRINCIPLE BEHIND D&O INSURANCE D&O liability insurance policies promote the concept of Business Judgment Rule2 which states that law presumes that directors of companies have bona fide regard for the interest of stakeholders of a company in running the management of the company and in taking important decisions. Under this rule, in plain language, it is to be presumed that in taking any decision about the company management, the directors pay utmost regard to the interest of all the stakeholders. The intent of legislation is to encourage just and well informed decisions by the company management without fear of personal liability and thereby to help the business to progress and to ensure that the shareholders wealth is multiplied. D&O insurance is just another assurance of putting into practice the business judgment rule and protecting the directors who work in the best interest of the company. In running a business, if a gap is created due to lack of express legal provisions, D&O insurance would fill the gap. The ultimate objective is to have the best business decisions.

A legal principle that makes officers, directors, managers, and other agents of a corporation immune from liability to the corporation for loss incurred in corporate transactions that are within their authority and power to make when sufficient evidence demonstrates that the transactions were made in Good Faith. The directors and officers of a corporation are responsible for managing and directing the business and affairs of the corporation. They often face difficult questions concerning whether to acquire other businesses, sell assets, expand into other areas of business, or issue stocks and dividends. They may also face potential hostile takeovers by other businesses. To help directors and officers meet these challenges without fear of liability, courts have given substantial deference to the decisions the directors and officers must make. Under the business judgment rule, the officers and directors of a corporation are immune from liability to the corporation for losses incurred in corporate transactions within their authority, so long as the transactions are made in good faith and with reasonable skill and prudence. The rule originated in Otis & Co. v. Pennsylvania R. Co., 61 F. Supp. 905 (D.C. Pa. 1945). In Otis, a shareholder's derivative action alleged that corporate directors failed to obtain the best price available in the sale of Securities by dealing with only one investment house and by generally neglecting to "shop around" for the best possible price, resulting in a loss of nearly half a million dollars. The federal district court ruled that although the directors chose the wrong course of action, they acted in good faith and therefore were not liable to the shareholders. The court reasoned that "mistakes or errors in the exercise of honest business judgment do not subject the officers and directors to liability for Negligence in the discharge of their appointed duties."

3.2.THE ECONOMIC PRINCIPLE BEHIND D&O INSURANCE The basic principle that governs the D&O insurance regime is the economic concept of risk aversion and its effects. Risk aversion implies the unwillingness of a person to accept a proposition which has an uncertain result and instead opt for another proposition that guarantees a certain result even if it be lower than the highest expected result in the first case. This concept of economics would apply to a highly knowledgeable individual who might be unwilling to take up the position of a director simply because he is afraid of ending up with personal liability. D&O insurance provides a shield in these cases. Such insurance can make a director or an officer risk-neutral if not risk-loving, both of which will benefit the company ultimately. By being risk neutral they can take important decisions for the company based upon all necessary information available at hand at the time of taking decision and in this manner they can give their 100% to the company. In addition to the above, purchase of a D&O insurance policy by a company will also give it the signalling strength by which it can claim to be a good employer in the job market. It can have an edge over its competitors. A liability arising from their position in the company might not only cause financial losses to directors and officers, but at the same time their personal goodwill might also get tarnished. There is no denying the fact that they have a large specific investment involved. So, with the right D&O coverage in place, a company will be able to attract the most efficient and able candidates on board and key positions. In the long run, the shareholders will be benefitted in the form of getting better returns and the society at large will also be better off in the sense that there will be increased productivity and increased job security. For companies, therefore, it is a cost benefit analysis. The better you pay for insurance, the more qualified people you get.

CHAPTER 4: A WALK DOWN THE HISTORY OF D&O INSURANCE The history of D&O insurance dates back to the 1930s when the first policy was introduced by the British insurance and reinsurance provider Lloyds of London. They foresaw the need of such a product in the face of the great economic depression of 1930 that upset the economies of the United States and many other countries in a major way. However, despite the vast consequences, the product did not sell well with the directors and officers of corporations and the D&O insurance policy failed to gain the required popularity. The law did not empower companies to indemnify their directors at that time. A decade later, the popularity of this new product in the insurance market began to gain and laws were passed in the US that empowered companies to indemnify their directors and officers. During the 1960s there were several mergers and acquisitions that led to litigations against companies and their directors and officers exposing their personal liability which only reconfirmed the need for companies to have D&O insurance upon the breach, he may incur liability for breach of fiduciary duties, for ultravires act, for wrongs committed by codirectors, for breach of contract, for wrongful act or acts mala fide, for negligence or statutory negligence. He may incur both civil and criminal liability. While for non-statutory liabilities the courts might apply business judgment rule to protect the directors, statutory liabilities will be dealt with according to statutory provisions. Statutory penal provisions provide for fines, penalties or even imprisonment depending upon the gravity of the offence or contravention and the director may also incur unlimited personal liability under certain provisions under the Companies Act, 1956. In countries like US, directors and officers are very much conscious of the D&O insurance programme of the employer company. This serves as an important consideration before joining the board. In India, barely one-tenth of companies listed on the Bombay Stock Exchange seem to have proper D&O liability insurance in place. The coverage limit is also much narrower and the insurance claims for directors and officers can generally be made for liability arising from misleading financial statements and mismanagement of funds only. Companies are indemnified against cost of litigation that it bears on behalf of its directors and officers. Considering the benefits and necessity, of late the Securities and Exchange Board of India has been considering making it compulsory for all listed companies to have proper D&O liability insurance cover to protect their directors and officers from exposure to personal risk arising from corporate frauds and scandals. While mutual funds and insurance

brokers in India are compulsorily required to take liability insurance cover, there is no such mandate for companies as of now.

CHAPTER 5: BASIC COVERAGES At its most basic, D&O insurance protects directors and officers from liability arising from actions connected to their corporate positions. Due to general expansion in the industry, market pressures and the industry's responses to the development of case law, D&O insurance has expanded beyond its original and basic coverage. Thus, a single policy now may provide multiple and varied options by standard form or endorsement. The individual coverages discussed below typically are subject to distinct terms, conditions and deductibles, and even may be subject to distinct policy limits or sub-limits. However, some common threads run through each coverage offered in a D&O policy. For example, D&O insuring agreements generally specify that coverage is limited to claims first made during the policy period. In addition, the insurer typically does not have a duty to defend but is required to cover the costs of the insured's defence. Insuring Agreement [A] (D&O): (SIDE A)

Although each policy will employ its own language, Insuring Agreement A, often referred to as "A-Side Coverage," typically provides coverage directly to the directors and officers for loss - including defence costs - resulting from claims made against them for their wrongful acts. A-Side Coverage applies where the corporation does not indemnify its directors and officers. A corporation may not indemnify its directors or officers because it either (1) is prohibited by law from doing so, (2) is permitted to do so by law and the company's bylaws but chooses not to do so, or (3) is financially incapable of doing so, due to bankruptcy, liquidation, or lack of funds. The laws regarding indemnification differ from jurisdiction to jurisdiction. Insuring Agreement A additionally may specify that coverage is limited to those claims connected to an insured's capacity as an insured director or officer of the company. This issue of capacity recurs throughout D&O coverage analysis. The limiting language may appear in the insuring clause, in the definitions of "wrongful act" or "insured" found elsewhere in the policy, or in all three clauses. Although a claim sometimes implicates an insured in a single and clear capacity, a claim may well arise out of an individual's multiple capacities. For example, an individual may be sued as a director and a shareholder of a company (perhaps as a purchaser or seller of company stock), or an officer of a homeowner's association may also be a homeowner and it may not be clear whether his or her actions were taken as one or the other - or both. Similarly, a corporations' lawyer may also sit on the board of directors.

Insuring Agreement [B] (Corporate Reimbursement): (SIDE B)

A typical Insuring Agreement B, or "B-side coverage," reimburses a corporation for its loss where the corporation indemnifies its directors and officers for claims against them. B-side coverage does not provide coverage for the corporation for its own liability. The language and conditions of Insuring Clause B typically mirror Insuring Clause A. Entity Securities Coverage:

Many D&O policies offer an optional coverage to protect the corporation against securities claims. Such coverage provides protection for the corporation for its own liability. Many policies today provide such coverage to the corporation whether or not its directors and officers are also sued; other policies, however, provide such coverage only where the corporation is a co-defendant with its directors and officers. Entity coverage may be part of the policy form as "Insuring Agreement C" or may be added as an endorsement. The addition of entity coverage for securities claims is a relatively new development, and addresses concerns and confusion raised by court rulings regarding allocation. Employment Practices Liability Coverage:

Employment Practices Liability ("EPL") coverage also has become a common addition to corporate coverage - often by endorsement to the D&O policy or as a stand-alone policy issued to the company. This coverage typically protects directors, officers, employees and/or the company against employment-related claims brought by employees and, in certain circumstances, specified third-parties. For example, it provides coverage for wrongful dismissals or failures to promote, sexual harassment, and other violations of federal, state or local employment and discrimination laws brought by the company's employees. EPL claims have also seen a dramatic increase in frequency and severity over the past decade. 5.1. Defence Issues: Most D&O policies do not impose a duty to defend on the insurer. They do, however, provide coverage for defence costs and give the insurer the right to associate with the defense and approve defence strategies, expenditures, and settlements. Right to Select Counsel:

(A) The D&O insurer cannot impose its choice of counsel on an insured - the insured generally has the right to select counsel, subject to the insurer's consent. D&O policies typically provide that an insurer may not unreasonably withhold approval of an insured's

choice of counsel. This feature is important to the insured corporation, which typically has developed ongoing relations with corporate and litigation counsel that it would want to use in high-stakes litigation against the company. (B) Reimbursement and Advancement of Defence Costs Although D&O insurers generally do not have a duty to defend, D&O policies do cover defence costs. The primary questions that arise in connection with the payment of defence costs regard (1) control over the costs incurred and (2) when the insurer must make defence payments. In connection with the first question, although insurers do not control an insured's defence, under D&O policies they are required to reimburse only reasonable defence costs arising out of covered claims. Thus, an insured or his chosen counsel does not get a blank check. Whether a D&O insurer must, or should, advance defence costs - that is, pay them as they are incurred - is a common question. Many of the issues affecting coverage cannot be resolved until the claim has been resolved. Specifically, certain exclusions only apply after a finding of fact has been made. For example, as discussed below, policies generally exclude coverage for losses arising out of fraud. The exclusion only applies, however, where there is a final judgment finding fraud. Thus, where fraud is alleged, coverage is uncertain until the completion of the claim. In such situations, insurers may have an interest in not advancing defence costs until coverage is certain. However, insurers have an interest in seeing their insured vigorously defend claims against them. A vigorous defence can be a costly endeavour that may be well beyond the means of an insured. Thus, many policies provide that insurers advance defence costs under the condition that, should the facts ultimately demonstrate a lack of coverage, the insured will reimburse the advanced monies. 5.2. Key Provisions and Exclusions: Twenty years ago, underwriters offered D&O policies based on two basic forms, and courts had seen very few cases in which they were asked to interpret those policies. Today, the number of D&O policy forms and cases interpreting them has multiplied. Although there are trends and standards within the industry, the specific language found in these policies differs from insurer to insurer and from policy to policy. Any coverage analysis must take into account the specific language found in the policy at issue. As a general matter, clear policy language will govern the application of coverage to a particular claim. Definition of Claim: Common to all coverages in a D&O policy is that each insuring clause generally provides coverage on a "claims-made" basis. In other words, it provides the coverage described for

claims made during the period for which the coverage is purchased. Additionally, the insured typically must report the claim to the insurer during the policy period or within a reasonable time. D&O policies generally define claim as any (1) civil, criminal or administrative proceeding, or (2) written demand for damages against an insured. Who is included as an insured will depend on which coverages are implicated and how the term is defined in the policy. That is, if it is a securities claim, and the policy so provides, a claim may be made against the company or against a director or officer. If it is an employment claim, and the policy so provides, a claim may be made against the company, a director or officer, or an employee. Some policies offer more detailed definitions of claim. For example, a policy may state that a civil proceeding includes arbitration, mediation or other alternative dispute resolution. A policy may also explain that an administrative proceeding includes a formal investigation. Many policies also include limiting a claim to those proceedings or demands made against an insured in his or her capacity as an insured. The capacity issue may be stated directly in the definition of claim, or may be stated in the definitions of "insured" or "wrongful act," either of which may be part of the definition of claim. Definition of Loss: Loss generally includes damages, judgments, awards, settlements and defense costs. Loss usually excludes fines or penalties, taxes, treble (or other multiplied) damages, and matters uninsurable under law. Where treble or multiplied damages are assessed, a D&O policy generally will cover the base amount, but not the multiplied portion of the loss. Some policies include punitive and exemplary damages in the definition of loss. Where included, coverage of punitive and exemplary damages explicitly is effective only where permitted by applicable law. Punitive or exemplary damages: Some states do not permit punitive or exemplary damages to be assessed at all. See e.g. Distinctive Printing and Packaging Co. v. Cox, 443 N.W.2d 566 (Neb. 1989). Those states that do permit punitive damages to be assessed may not permit insurance against them. See e.g. City Products Corp. v. Globe Indem. Co., 151 Cal. Rptr. 494 (Cal. Ct. App. 1979). Those states prohibiting coverage of punitive damages generally base the prohibition on public policy concerns. The longstanding reasoning is that the assessment of punitive damages is

intended to set an example or punish the wrongdoer, and permitting insurance against such punishment would render such punishment ineffective. Id. 5.3. Matters uninsurable under applicable law: Matters deemed uninsurable under law also may be the basis of explicit exclusions elsewhere in a policy. For example, coverage for liability for fraud may be barred by law, as well as by dishonesty exclusion. As discussed above, coverage for punitive damages also may be barred by law. Exclusions1. Dishonesty Exclusion: Dishonesty exclusions bar coverage for claims made in connection with an insured's dishonesty, fraud, or wilful violation of laws or statutes. The dishonesty exclusion also may be coupled with personal profit exclusion, barring coverage in connection with an insured's illicit gain. These exclusions typically are followed by a severability clause - that is, a caveat providing that the acts or knowledge of one insured will not be imputed to any other insured for the purposes of applying the exclusion. In other words, the exclusion only bars coverage for the insured(s) whose acts or knowledge are the basis of the claim at issue. As mentioned above, many dishonesty exclusions include an adjudication clause, which provides that the exclusion only applies if the fraud or dishonesty is established by a judgment or other final adjudication. In connection with this clause, the question arises whether the judgment or other final adjudication must be in the underlying litigation. For the most part, the case law on this subject supports the position that most adjudication clauses, as they currently are written, require a final adjudication in the underlying litigation, rather than in a parallel coverage action or other lawsuit. Courts have held either that (1) the adjudication clause is ambiguous, so must be interpreted in favour of coverage,

2. Insured v. Insured Exclusion: As the name implies, an insured versus insured ("IvI") exclusion bars coverage for claims made by an insured (e.g., a director, officer or corporate insured) against another insured. In addition, the exclusion may bar coverage for claims brought (1) by anyone directly or indirectly affiliated with an insured, (2) by a shareholder unless the shareholder is acting independently and without input from any insured, or (3) at the behest of an insured. The

exclusion essentially prevents a company from suing or orchestrating a suit against its directors and officers in order to collect insurance proceeds. Questions regarding the application of the exclusion arise in the context of derivative lawsuits, bankruptcies and receiverships. Specifically, it is clear that where a lawsuit is brought with the "active assistance" of an insured, the exclusion bars coverage. It is not always clear, however, when a lawsuit is brought with the indirect involvement of, or at the behest of the insured, and there is very little case law expounding on the issue. 3. Professional Liability Exclusion: As a general matter, D&O policies do not provide coverage for liability associated with the provision of professional services. Thus, where a bank officer is liable for acts as a banker rather than an officer of the bank, a D&O policy with professional liability exclusion would not provide coverage. Similarly, where a doctor is the president of a professional corporation, the D&O policy would only protect him or her against liability from acts as president of the corporation, and would not provide coverage for professional malpractice claims. The line between professional services and acts outside the scope of this exclusion can be a fine one. Courts often draw a distinction between those acts that require special training or are at the heart of the profession and those acts that are administrative in nature. 4. Prior Acts Exclusion: Prior acts exclusions bar coverage for claims arising out of an insured's wrongful acts prior to a specified date. The date may coincide with the termination of coverage under a previous policy. The date may also coincide with a change in corporate status - such as a merger or acquisition. For example, where a subsidiary is acquired, the prior acts exclusion may exclude coverage for the subsidiary prior to the time it became a subsidiary. In such situations, the subsidiary may have run-off coverage from a previous policy to protect against liability arising from those excluded acts. 5. Prior and Pending Litigation Exclusion: Prior and pending litigation exclusions generally exclude coverage for (1) claims pending prior to the inception of the policy, or another agreed upon date, and (2) subsequent claims based on the same facts or circumstances. Conflicts primarily arise regarding the second component of this exclusion. Specifically, the question arises as to when a subsequent claim is based on sufficiently overlapping facts and circumstances to fall within the scope of the

exclusion. Courts have held that the two claims need not be brought by the same plaintiffs to trigger the exclusion.

CHAPTER 6: EXTENSIONS AVAILABLE AND NEEDED The extensions are subject to the insuring clauses and all other terms and conditions of the policy. Advance payment of defence costs

Where the insurer have not decided whether an insured is entitled to the cover set out in this policy, they will still advance defence costs on behalf of that insured within 30 days of being invoiced for them by defence counsel. Defence costs advanced on behalf of an insured who is not entitled to the cover set out in this policy must be repaid to the insurer. Emergency costs coverage

The insurer agrees to pay up to 10% (ten percent) of the indemnity limit in defence costs incurred in an emergency without our prior written agreement, provided the insurer are then asked to give their written agreement within 30 days of those defence costs first being incurred. Investigation costs

The insurer agrees that defence costs shall include investigation costs. the total amount we agree to pay under this extension for all investigation costs payable on behalf of all insureds shall not exceed the amount stated in item 4 of the schedule to this policy. Public relations expenses

The insurer agrees that defence costs shall include public relations expenses. the total amount we agree to pay under this extension for all public relations expenses payable on behalf of all insureds shall not exceed the limit expressly stated. Extradition costs

The insurer agrees that defence costs shall include extradition costs. Bail bond and civil bond expenses

The insurer agrees that defence costs shall include bail bond and civil bond expenses. The total amount we agree to pay under this extension 2.6 for all bail bond and civil bond expenses payable on behalf of all insureds shall not exceed 10% (ten percent) of the indemnity limit. pollution defence costs

Where a claim made against an insured person arises from a wrongful act or employment practice breach actually or allegedly committed in connection with the discharge, dispersal, release or escape of pollutants, the insurer agrees that exclusion (pollution) shall not apply to: (a) Defence costs; or

(b) Loss, but only where the claim is a derivative action brought in the name of an insured entity by someone who is not an insured person. The total amount we agree to pay under part (a) of this extension for all defence costs payable on behalf of all insureds shall not exceed the limit provided. Occupational health and safety defence costs

Where a claim made against an insured person arises from an actual or alleged breach of any occupational or workplace health and safety legislation, the insurers agree that the bodily injury/property damage exclusion from radioactivity and nuclear risk shall not apply to defence costs. Outside directorship covers

The insurer agree to pay on behalf of each outside director, loss which results from a claim first made against them and reported to us during the insurance period alleging a wrongful act. Cover under this extension is excess of any other insurance or indemnity available to the outside director. If any other insurance available to the outside director is provided by the insurer, the indemnity limit shall be reduced by the indemnity limit stated in the schedule of that other insurance. Additional excess limit for insured persons

Where conditions (a) to (b) of this extension have been satisfied, the insurers agree to pay on behalf of each insured person, loss which an insured entity is not permitted or required to pay them by way of indemnity and which results from a claim first made against that insured person and reported to us during the insurance period. The conditions referred to above are as follows: (a) The indemnity limit has been exhausted; and (b) Any other available insurance or source of indemnity available to an insured person has been exhausted. The total amount, in addition to the indemnity limit, we agree to pay under this extension for all claims for all insured persons shall not exceed 10% (ten percent) of the indemnity limit in the aggregate. New subsidiary cover

Where conditions (a) to (d) of this extension are satisfied, we agree that the definition of insured entity shall include a subsidiary created or acquired during the insurance period, but only in relation to a wrongful act or employment practice breach actually or allegedly committed after the date that subsidiary was created or acquired. The conditions referred to above are that a subsidiary:

(a) Has total gross assets outside of the United States of America or Canada or their territories or possessions which are less than 25% (twenty five percent) of the total gross assets of the insured entity; (b) Has total gross assets within the United States of America or Canada or their territories or possessions which are less than 25% (twenty five percent) of the total gross assets of the insured entity; (c) Is incorporated outside of the United States of America or Canada or their territories or possessions; and (d) Does not undertake activities which attract one or more of the provisions of the securities act of 1933 (usa), the securities exchange act of 1934 (usa), any rules or regulations of the securities and exchange commission (usa), or any federal, country, state, or territory rules or regulations or local or provisional statute in the united states of America or any of its territories or possessions relating to securities, or the equivalent in Canada and any of its territories or possessions. If any of the conditions listed above cannot be satisfied then our prior written agreement by way of endorsement to this policy will be required before the cover available under this extension will apply. Former subsidiary cover

The insurer agrees to extend the cover available under this policy to any entity that ceases to be a subsidiary either before or during the insurance period, but only in relation to a wrongful act or employment practice breach actually or allegedly committed whilst the entity was a subsidiary. Heirs, estates and legal representatives

The insurer agrees to extend the cover available under this policy to the estate, heirs, legal representatives or assigns of any deceased or mentally incompetent insured person, but only in relation to a wrongful act or employment practice breach actually or allegedly committed by such insured person. Bi-lateral discovery period

Where the insurance period has ended and this policy has not been renewed, replaced with similar cover or cancelled, the insured may give us written notice within one of the applicable discovery periods set out in this extension, of any claim first made against the insured before or during the discovery period alleging the occurrence of a wrongful act or employment practice breach prior to the end of the insurance period. The insured is entitled to a discovery period of:

(a) 90 days, granted automatically with no additional premium payable; or (b) 12 months, if the insured asks for such period in writing within 15 days of the end of the insurance period and pays, within a further 15 days, a further premium of 50% (fifty percent) of the annual premium we charged for the insurance period; or (c) 72 months, if a transaction takes place and the insured asks for such period in writing within 30 days of the end of the insurance period and accepts any terms and conditions, including an additional premium, we may reasonably impose. Any discovery period purchased under this extension cannot be cancelled and any additional premium paid for the discovery period is not refundable. Retired directors and officers

The insurers agree to extend the cover available under this policy to any insured person who retires before: (a) A transaction; or (b) The insolvency, liquidation, receivership, bankruptcy or administration of the insured; or (c) The end of the insurance period but only in relation to a claim first made against them within 84 months of the end of the insurance period which alleges they committed a wrongful act or employment practice breach before they retired. The cover this extension provides will be automatically withdrawn if: (i) This policy is renewed, cancelled or replaced with similar cover; or (ii) A discovery period is purchased by the insured under extension (bi-lateral discovery period). Crisis containment

The insurers shall reimburse the company for the crisis loss which the company incurs by reason of a crisis event which first occurs and is notified to us during the insurance period. The total amount the insurers agree to pay under this extension for all crisis loss payable on behalf of all insured shall not exceed to the amount mentioned in the policy and is part of, and not in addition to the indemnity limit. Tax extension The insurers agree to extend cover to include an insured persons loss arising from their personal liability for unpaid taxes where the company has become insolvent except to the extent that such liability arises from the wilful intent of the insured person to breach any statutory duty governing the payment of taxes. The total amount we agree to pay under this

extension shall not exceed the limit prescribed expressly and is part of, and not in addition to, the indemnity limit Continuous cover

Where the insured: (a) First knew, or ought reasonably to have known, on or after the continuity date of any claim or circumstance that could give rise to a claim; and (b) Did not give notice of that claim or circumstance under any previous insurance providing directors and officers' liability cover on or after the continuity date as shown on the schedule; and (c) Gives notice of that claim or circumstance to us during the insurance period we agree not to apply exclusion (a) or (c), provided that: (i) The insured's failure to give earlier notice of such claim or circumstance to the insurer cannot, in their view, be explained by fraud; and (ii) The insurers may, in their absolute discretion, apply to such claim or circumstance, any of the terms and conditions of the insurance providing directors and officers liability cover in existence when the insured first knew, or ought reasonably to have known, of it, or the terms and conditions of this policy; and (iii) The insured has maintained, without interruption, a directors and officers liability insurance policy issued by us and we were the directors and officers liability insurer when the insured first became aware of such claim or circumstance for the purposes of this extension, continuity date means the date stated in the schedule. Prosecution costs

The insurers agree that defence costs shall include the prosecution costs the total amount we agree to pay under this extension for all claims for all insured persons shall not exceed 10% (ten percent) of the indemnity limit in the aggregate, and is part of an not in addition to the indemnity limit. Deprivation of assets extension

The insurers agree that defence costs shall include deprivation of assets expenses the total amount we agree to pay under this extension for all claims for all insured persons shall not exceed the limit prescribed in the aggregate, and is part of and not in addition to the indemnity limit.

Fines and penalties extension

The insurers agree that the definition of loss is extended to include any civil fines and civil penalties awarded against an insured person imposed by law, provided that we are not legally prohibited from paying the civil fines and/or civil penalties under the law applicable to this policy. The total amount we agree to pay under this extension for all claims for all insured persons shall not exceed 10% (ten percent) of the indemnity limit in the aggregate, and is part of an not in addition to the indemnity limit.

CONCLUSION: The business of liability insurance is just in its infancy in India, in fact given the size of the Insurance market in general in India and the given penetration figures given by the IRDA, this makes u wonder so much is left to do in the insurance market, and this is an exciting phase in the given point of time. The entry of foreign insurers and the proverbial struggle between the old guard and the new guard makes for a exciting time to be in the market right now. The project allocated to me, was bout the extensions that are available and that are needed in directors and officers liability insurance policies. In fact when making the project I came to understand the acute responsibility a director faces, the liability is not only emanates from the common law but also from around 450 statutes that enforces mandatory duty upon a director. But given the booming economic situation in our country and the current pace of economic development that are currently going around in all parts of the country, the number of companies that are being incorporated and the number of companies that currently going for listing is simply amazing, this an phase of growth a consolidation of growth and consolidation for the corporate houses operating in India. This also gives rise to liability to the directors jointly and severally for actions taken by them in the course of their employment. Thus this project talked about the current protection available to them in the Indian context and what covers and extensions should be extended by the insurers towards providing better coverage towards the directors. In comparing the covers available in India and in foreign I realized the Indian insurers have followed the western concepts but there isnt any singular that stands out. That is there is a lack of product innovation and the market being as large as it is, there should some market research and product innovation for the directors. According to the latest numbers released by FICCI, there are almost 83,000 SME and corporate houses operating in India. This gives a fairly good idea how big is the market and from this point this only going to get bigger. Thus to conclude it is the opinion of the researcher the covers and extensions available though adequate in the current market scenario would become woefully ineffective in the very near future, so the insurers are advised to innovate the basic coverages available.

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