Company directors rush for insurance cover

Six months ago, directors of Kolkata-based AMRI Hospital were part of a closely-knit industrial circle in the city. Since the last couple of days, they are in jail on charges of culpable homicide not amounting to murder, following a fire in the hospital that killed at least 90 people on Saturday.

It is this increasing vulnerability of senior corporate executives towards litigations that has set the ball rolling for directors and officers’ liability cover for insurance companies.

With the upcoming Companies Bill 2011 seeking to introduce a more rigorous regime for board members, especially independent directors, insurance companies are recording numerous inquiries for insurance for directors.

Directors and officers’ liability insurance provides cover against legal expenses in various cases like shareholders claims, accusations of accounting irregularities, exposures related to mergers and acquisitions, corporate governance and compliance with various legal statutes.

“There is definitely an increase in the number of companies opting for directors and officers’ liability insurance. We have seen more inquiries from corporates in the last few months,” said Sanjay Datta, head (customer service- health and accident), ICICI Lombard General Insurance.

In the aftermath of the Satyam scandal, in which Ramalinga Raju, former head of Satyam Computers, was accused of massive accounting discrepancies, insurance for directors gained steam. More recently, the 2G spectrum auction scam and the bribes-for-loans scandal that involved state-controlled banks and lenders, too, landed senior corporate executives in jail.

The Companies Bill 2011, tabled in the Lok Sabha on Wednesday, proposes to introduce class action suits for the first time in the country. This would empower investors to sue a company for ‘oppression and mismanagement’ and claim damages.

Ashok Pareek, central council member, Institute of Companies Secretaries of India, and executive director of Srei Capital Markets, said, “Currently, less than five per cent of listed companies have bought such cover, but going forward, the Companies Bill 2011 would pave the way for many companies to opt for directors liability insurance cover.”

A National Insurance executive said, “In the last few months, we have seen more inquiries for insurance cover for directors. This is especially true for corporates with foreign board members. Outside India, directors’ liability insurance has been quite popular, but it is gradually selling in India as well.”

Interestingly, the scope of the policy differs from companies to companies, as these provide insurances against varied risks.