DrDirectors and Officers (D&O) liability insurance is a policy that provides compensation for third party losses caused by gross negligence on the part of company directors, supervisors and senior managers in the performance of their duties. This type of insurance is considered an important part of the governance of listed companies.
Q: What is the scope of Directors and Directors Liability Insurance?
a: In addition to the company itself, it can provide coverage for individuals such as senior corporate executives and employees with managerial responsibilities. While the specific terms and conditions may differ between insurance companies, coverage can be mainly divided into three categories, as follows.
Side A coverage is intended for insured individuals, including corporate executives, to indemnify losses arising from their own negligence, misconduct and/or obligations incurred by their spouses, agents and heirs. It is necessary to note that this coverage generally applies when the insured company is unable or lacks the ability to compensate the directors and officers for their liabilities.
Side B coverage refers to the company’s compensation coverage. When a company indemnifies its senior executives for liabilities they are obligated to assume in accordance with compensation agreements, articles of association or legal provisions, the insurance company has the responsibility to indemnify the company for that compensation.
Side A and side B coverage are some of the most widely used provisions in the initial stage of the D&O liability insurance market. With the development of the stock market and the consequent huge amounts of compensation for securities wrongdoing, side coverage (c) appeared. Side C mainly covers corporate liability in respect of securities claims.
In addition, some D&O liability insurance policies also cover employment claims filed by employees against companies and their senior executives, which also stems from an increase in litigation related to employment obligations.
Q: Who are the applicants and insured under D&O insurance?
a: The applicants are usually a company that is generally responsible for paying the premiums. Under Chinese law, Article 39 of the Corporate Governance Law for Listed Companies stipulates that listed companies can purchase liability insurance for their senior executives with the approval of a general meeting of shareholders. In practice, purchasing directors and directors’ liability insurance is an effective way to improve corporate governance.
Typically, those insured under D&O liability insurance include the company and the insured individuals. Depending on specific provisions in the insurance policy, insured individuals typically include former, current, and future senior executives, employees with managerial responsibilities, trustees, outside company directors, shadow directors and their spouses, estate managers, heirs, agents, and executors.
Q: What is the condition for fragmentation?
a: A D&O liability insurance policy usually includes multiple insured parties. To avoid the situation where the actions of an insured individual will void the full insurance coverage of all insured parties, policies generally include a separability clause. In this way, the policy separately covers the interests of each insured party. The exclusion of an insured party from insurance coverage does not necessarily affect the coverage available to other insured parties.
However, some D&O policies may limit the scope of the separability clause. For example, the terms of the insurance may also provide that the actions of the insured individuals in the insured company shall be considered as the actions of the insured company itself.
If certain acts of such insured individuals result in the insurance company having the right to void the policy or exclude coverage, neither the individuals nor the insured company will be entitled to obtain coverage under the policy.
Q: What are the coverage limits?
a: Article 6 of the regulatory procedures for liability insurance business stipulates that liability insurance shall ensure the legal liability of the insured to compensate the third party that the insured has caused damage.
Insurers must correctly understand the definition of liability insurance, clarify the relevant concepts and the relationship between rights and duties, carefully distinguish between insurance liabilities, and not cover criminal fines or administrative penalties through liability insurance.
The principle of insurable interest is one of the basic principles of insurance law, as it requires that the insured in property insurance have an insurable interest in the subject matter of the insurance when the accident occurs.
From the legislative and regulatory intent of regulatory measures, the primary purpose of criminal fines and administrative penalties is to punish individuals and entities who willfully commit criminal or fraudulent acts. Accordingly, although criminal fines and administrative penalties may also cause losses to individuals and entities, individuals and entities have no insurable interest under this policy.
Hence, insurance companies should not bear such kind of losses; Otherwise, the purpose of criminal fines and administrative penalties will be undermined. Therefore, if a principals and officers’ liability insurance policy is subject to Chinese law, insurance companies should pay special attention to avoid providing coverage for risks and losses prohibited by regulatory measures.
Q: What are the provisions for the insurance period?
a: Besides the retroactive date provisions commonly used in liability insurance policies, a principals and principals liability insurance policy may also include a discovery period clause. This usually extends the insurance period for a certain period after the expiry of the policy.
The discovery period requirement usually states that during a certain period immediately after the expiration of the insurance policy, the insurance company will cover losses arising from wrongful acts of the insured that first lead to a claim for compensation during the insurance period or discovery period.
The insured must report the claim or related information to the insurance company during the insurance period, or before the end of the discovery period. In general, D&O liability insurance policies have a free discovery period of 30 to 90 days. If the insured needs to extend the discovery period, an additional premium is usually required. In practice, the insured’s obligation to report in liability insurance policies is often confused with the statute of limitations.
Wan Jia is a partner and Zhu Bingjing is a partner in Angie Broad.
Angie Broad law firm
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