Rising trend in uptake of D&O Insurance

A rising trend in demand for D&O cover in India has been witnessed recently; with directors increasingly being held personally responsible for the management decisions made during every working day. While a Company’s liability is limited by shares or by guarantee; the personal liability of a Director and/or Officer of a Company is unlimited. Hence every time a claim or allegation arises, a Director’s personal assets are at risk.

What is D&O Insurance?

Directors’ and Officers’ Liability Insurance, often referred to as just D&O Insurance, is a type of liability insurance made for the directors and key officers of a company or the company itself. This insurance acts as a cover for directors and officers of a company in case of any costs of a lawsuit like damages, defense costs, lawyers’ fees, consequent losses etc. in event of being held responsible;in capacity of their duties; for any wrongful acts or deeds.

The wrongful acts can include- omissions, errors, misstatements, misleading statements, neglect or breach of duty by such directors or officers. Besides this there are plenty instances which could lead to a lawsuit ranging from both civil and criminal suits to regulatory investigations and trials.

Rising trend

Directors and officers liability insurance seems to have become a core component of corporate insurance. Various insurance companies like Secure Now have witnessed a growing demand from Indian companies in the past few years. Moreover there seems to be a shift from concept selling to an increased general awareness amidst companies about D&O insurance. Most demand in India is from the IT sector, followed by pharmaceutical and auto companies. Factors which have contributed to this rising trend include- strict regulations, complex listing requirements, increasing legal fees and a litigious environment.

An increasing demand for this policy is seen in private firms as well as large public sector companies. Indian multinationals, listed companies or those planning to list their securities are keen on getting the policy. Also companies planning an acquisition/ merger or raising capital through private equity; are increasing looking out for a good D&O cover.

Understanding the transition

In the past due to a less litigious environment various Indian companies resisted the need for D&O insurance; mainly because most of them assumed they would never have to face a situation where they would need to deal with a D&O claim.

However that view has gradually transformed due to various changes in the business environment in terms of changing regulation in India along with increased globalization bringing in higher risk factors associated with directors and officers. The exposure to globalization of Indian companies and increased shareholder lawsuits has made the job of directors and senior executives not only more difficult but also more exposed to its own set of risks.

The increase in exposure and understanding of erroneous decisions taken by senior executives, has made companies aware of the need of the getting an insurance cover for D&O liability. Increase in law suits along with the economic downturn has also brought an increased awareness of D&O insurance.

Moreover most companies are of the view that in this globalized environment, there is a heightened likelihood of anyone anywhere to be a prospective claimant. Moreover costs increase rapidly in case of a claim and are hence expensive to defend and resolve; which is also creating increased trendof getting a D&O cover.

Motivation for buying D&O cover in India

 Several Indian companies are getting themselves listed on foreign stock exchanges, acquiring or merging with non-Indian companies. This creates a litigious environment in overseas jurisdictions; also the high legal costs are making getting D&O insurance imperative for the companies.

With more Indian companies becoming globalized; it is highly likely that the risk of claims and litigation for the directors and officers of a company will continue to see a major increase, both in the present as well as in the future.

Stricter Regulations is also one of the strongest reasons behind firms increasing their requirement for purchasing insurance for the company. Moreover the purchase of getting D&O liability cover seems to be driven more by regulatory requirements rather than due to a risk management approach.

 Buying the policy

With increased awareness about the exposure to risk; the Indian perception that a claim cannot happen has changed to it can happen. Indian companies are becoming more global and entrepreneurs are moving up the value chain in the supply of goods and services; which has increased the demand for liability insurance.

With Indian companies gaining a greater understanding of the benefits of D&O insurance, the demand for the cover is expected to increase further. In fact as private company D&O insurance policies provide broader coverage at a relatively low cost compared to publicly listed companies; D&O cover ought to further increase among private companies.

Due to rising demand for the policy; several leading companies in India are offering D&O insurance policies which include ICICI Lombard, Tata AIG, HDFC Ergo, Bajaj Allianz, New India Assurance, etc. Various insurance agents and companies can guide a company on which policy best suits the company’s requirements.