Latest Indian D&O Risks And A Look At Captive Insurance

D&O insurance policies provide liability coverage for company executives, primarily on an anonymous basis, to protect them from claims arising from choices and wrongful acts made in the course of their regular responsibilities. It includes financial protection for managers against the repercussions of actual or alleged “wrongful acts”.

Multiple instances may give rise to a claim.

1)   Cyber-attacks & Data loss

 Oftentimes, data loss is a result of cyber incidents. In this context, India's proposed new data privacy law, which aims to tighten and harmonize standards with those in other jurisdictions while also imposing stiff fines and penalties for non-compliance, is still pending in parliament, with a vote due later this year. It will be interesting to see how the law is perceived by the industry, once implemented.

2)   Climate change, environment and other ESG factors

The SEBI press release last year said the Business Responsibility and Sustainability Report (BRSR) would apply to the top 1000 listed entities (by market capitalization) and other companies of all sizes. These updates are now integrated with the MCA21 portal for the sake of accessibility.

Concerns about green-washing and the need to scale up sustainable investment are putting pressure on Indian companies to publish climate and ESG related financial disclosures. As the focus on reporting at the regional and national levels becomes more intense, reporting standards are becoming more standardized.

On climate, environmental, and ESG issues, companies and their directors and officers can expect increased scrutiny of their disclosures, business operations, and climate policies from investors, stakeholders, financial institutions, regulators, and insurers.

 3)   Insolvency

 In India, as in many other nations, the central government took efforts to prevent businesses from going bankrupt during the pandemic by raising the bar for initiating insolvency procedures and halting the process altogether.

Despite the suspension being lifted, the number of applications has not increased significantly, possibly due to the pandemic's several succeeding waves, which hampered the adjudicating authority's ability to consider such cases.         

With the adjudicating authority now operational, an influx of applications is expected. Also, recent amendments to the insolvency regulations require resolution professionals to report to the Insolvency and Bankruptcy Board of India their opinion and determination in respect of avoidance transactions, such as preferential transactions, undervalued transactions, extortionate credit transactions, fraudulent trading, and the like.

As a result, a resolution expert is now obligated (has a duty) to actively investigate whether a corporate debtor has been involved in the aforementioned avoidance transactions.

 4)   Regulatory exposures

 India has various investigative agencies that are operating with all powers. The Enforcement Directorate (ED), which has broad powers to investigate and prosecute corporations for money laundering and violations of the Foreign Exchange Management Act, is one of the most active authorities.

 Regulatory requirements are constantly evolving, and the risk of breaking one of the many rules is high, especially in this era of accountability.

 Overall, regulatory exposure is one of the significant risks that Indian entities face as a claim can not only trigger due to non-compliance but a general enquiry as well where directors are seen as suspects for potential wrongful acts, in which case legal representation costs get covered by the policy.

 Captive Insurance - A potential alternative to a commercial D&O policy

 Large entities and new startups offering unique, one-of-a-kind services to large investors may require a special set of coverage (including non-indefinable losses) and high limits. A standard carrier may not fulfil this demand.

 This is where captive insurance comes into the picture.

 A ‘captive insurer’ is an insurance firm that is entirely owned and controlled by its insureds.

 There are two types of captive insurers.

 Pure captives - captive insurers that are owned entirely by their insureds, either directly or indirectly.

 Sponsored captives - Owned and controlled by parties unrelated to the insured are known as sponsored captives.

 Some drawbacks of forming a captive insurance company in India for a D&O policy

 ●      Capital and funding requirements

●      Claims handling and administration

●      Coverage program structure

●      Pricing being matched by standard carriers

●      Lack of basic insurance infrastructure

●      Absence of side A cover

●      The final decision may be taken by the insured, leading to a conflict of interest and more

 As the Indian market evolves further, it will be interesting to see how the mechanism of this potential alternate shapes up.