Learning course on Liability Insurance - 2

Following up on Liability learning course where we discussed development of civil liability and casualty products, this course will focus on financial and other products in Liability insurance.  

Financial liability products complete the Insureds Insurance needs and can be looked at as Balance sheet protection tools.

Professional Indemnity / Errors & Omissions

Errors & Omissions Insurance, also referred to as Professional Indemnity protects individual /firm/ organization  having significant exposure  arising out of the sale or use of their products and services, against claims for financial loss (as opposed to bodily injury or property damage which is covered by Casualty products).

Need for this product comes from - 

• Highly litigious market (tendency to enforce ones rights)

• Customer awareness (increasing by the day)

• Contractual requirement (written contracts are a norm now)

Professional Indemnity - Coverage

Policy Coverage

The Company shall pay on behalf of the Insured

Loss arising solely out of Professional Services resulting from any Claim first made against such Insured during the Policy Period. 

  • Professional Services means only those services which are performed or required to be performed by the Insured for others for a fee
  • Wrongful Act means any error, misstatement, misleading statement, act, omission, neglect, or breach of duty committed, attempted or allegedly committed or attempted, by an Insured Organsiation or an Insured Person, individually or otherwise, on behalf of the Insured Organisation, solely in the performance of Professional Services

Professional Indemnity - Extensions

Policy Extensions

• Loss of documents 

• Dishonesty of employee 

• Infringement of copy right except for patents and trade secretes 

• Defamation (Libel & slander)

• Court attendance 

• Extended reporting period 

Professional Indemnity - Exclusions

Exclusions

• Dishonest, Fraudulent, Criminal or Reckless Acts

• Bodily Injury Property Damage Claims

• Guarantees, Warranty, Penalty Clauses or any other liability assumed under the contract. 

• Personal Injury Claims

• Illegal Personal profits or advantages & disputes regarding the  considerations for the contract 

• Intellectual Property Rights Infringements which may be covered as an extension 

• Insured v/s Insured

Professional Indemnity - Rating

Rating factors 

• Revenue / turnover 

• Type of professional service 

• Clients/customers 

• Nature of contracts, in case of contract specific policy 

• Geographical spread of revenue 

• Work split

• Sub-contracting

Professional Indemnity - Non Preferred risks

Errors & Omission/PI – IT Risk

• Policy Limits not more than USD 3Mn or INR 150,000,000/-

• Companies giving Service/applications/Software to Financial Institutions 

• Companies giving Services to application/Software of Healthcare/Aviation/Aerospace/Offshore. 

• Revenue of Insured’s Company should not exceed USD 15MN or 15% of whichever is higher in USA/Canada 

Errors & Omission/PI – other than IT

• Financial Institution/Venture Capitalist/Mutual Fund Asset management other then India only no exceeding Limit of USD 1Mn or INR 5 Crs, where premium is not less than INR 3.5 Lacs.

• Educational Institute/Schools with Worldwide Cover 

• Revenue of Insured’s Company should not exceed USD 15MN or 15% of whichever is higher in USA/Canada 

• Construction other then Consultation/Architects 

• Media Liability – Not More Then USD 1Mn or INR 5 Crores (Excluding Covers for News Channels/News Papers & Radio Broadcasters)

Professional Indemnity - Pre Underwritten products

Available for Doctors (not for hospitals) and Chartered Accountants (not for CA firms)

For doctors premium differs with category of risk (3 categories) and training level of staff. 

Limit of Indemnity (AOA) available up to 1 Crore. 

Policy ratio is default 1:1

Coverage territory and Jurisdiction is default INDIA 

Policy form is default Claims Made with Right to defend condition



Directors and Officers Insurance - Background

What is Corporate Governance?

Corporate Governance aims to shift focus merely from legal compliance to a commitment of directorial responsibilities towards all stakeholders.

 • SEBI monitors and regulates the corporate governance of listed companies in India through Clause 49. The clause is incorporated in the listing agreement of stock exchanges and it is compulsory for companies to comply with its provisions. 

  • A new Clause 49 to be incorporated in the listing agreement with requirements relating to Composition of Board, Audit Committee, Remuneration Committee, Board Procedure, Compliance, CEO/CFO Certification, etc 

Recent events involving TATA group and Infosys have brought governance issues back in limelight. 

Directors and Officers Insurance - Exposure

Besides Corporate Governance issues, D&O exposures also arise from

  • Mergers and Acquisitions
  • Insolvency / liquidation proceedings, bankruptcy suits, etc.
  • Violation of legal statutes
  • Listing of stock or debt on a stock exchange
  • Foreign domiciled subsidiaries or assets
  • Different disclosure requirements in different jurisdictions


Directors and Officers Insurance - Claimants/ Suitors

Who are the usual Claimants 

• Government or Regulatory Bodies

• Shareholders

• Employees 

• Directors

• The Official Receiver / Liquidator 

• Customers

• Competitors 

• The Public

• The Company 

• Creditors

Directors and Officers Insurance - Who is covered

Who’s Covered

• Existing Directors and Officers of the Company 

• Past and future Directors and Officers of the Company 

• Legal heirs, representatives or assigns of such Directors and Officers

• Directors and Officers of Subsidiary Companies 

• Not necessary to specify individual names of Directors/ Officers but the designation/ rank of Officers desired to be covered should be specified

Directors and Officers Insurance - Wrongful Acts

Examples of Wrongful Acts

• Misuse of corporate funds

• Companies Act violations

• False statements to Government agencies 

• Breach of Duty to minority shareholders 

• Irregularities in securities issues 

• Misleading representations 

• Inadequate supervision

• Financial Loss to the Corporation 

• Misuse of inside information 

• Employee harassment 

• Imprudent expansion

Directors and Officers Insurance - Policy structure

The policy protects the Directors and Officers against

•It covers the directors and officers who may commit some  Wrongful Act in their capacity as directors and officers of the company.

• The Policy coverage is divided into two Sections: 

– A. Directors and Officers 

– B. Company Reimbursement

Directors and Officers Insurance - Side A cover

Directors and Officers (Side A)

This Section relates to the insurance cover of the Director/ Officer

If action against the Director is successful, then he is on his own and is exposed to legal costs as well as the damages awarded against him by the Courts

The employer Company in such a situation will not indemnify him and this Section comes into operation, provided the Director/ Officer has not acted in a deliberately dishonest manner

Directors and Officers Insurance - Side B cover

Company Reimbursement (Side B)

This Section relates to the insurance cover of the Company itself

Covers the obligations of the Company (as per Articles of Association)  to indemnify its Director/ Officer to defend against any civil/ criminal action

Reimbursement is limited to only the legal costs expended subject to successful defence

Directors and Officers Insurance - Features

– The policy being  “Claims Made Basis” allows for indemnification of the claims made during the policy period and hence covers the prior acts retroactively . 

– No right of Cancellation

– Severability of all Exclusions

– The policy covers all the Directors & Officers of the Company & its subsidiaries and is not on named/numbered basis. Even the Associate Companies can also be added. Past, present and future directors and officers are covered. 

– Directors are easily identifiable.  Officers refer to employees occupying a management or supervisory  capacity. 

– Cover also provided for administrative or regulatory proceeding or official investigation .

 – Claims under Employment disputes also covered.

– Derivative action cover for Pollution claims 

– Any fresh IPOs or buy backs occurring during the policy period could also be covered at NIL or an Additional Premium subject to advising the insurer

Directors and Officers Insurance - Features

–Defence costs –Legal Costs means legal and professional fees and expenses reasonably incurred in the defence of actions, suits or proceedings and appeals therefrom as well as the cost of appeal, attachment and similar bonds.  This does not include overhead or benefit expenses associated with salaries, wages and fees.

 –Defence costs cover if a director/officer is legally compelled to appear at an official investigation 

–Broad definition of Claim Includes Criminal proceedings, formal administrative and regulatory proceedings 

–Aimed at protecting directors and officers of the company.  It is therefore a cover to protect individual corporate managers 

–The policy does not cover the company for its liability (though there are extensions available that will protect the company in certain areas). 

–The directors are protected against claims made by court appointed or externally appointed liquidators and /or receivers

Directors and Officers Insurance - Extensions

Policy Extensions 

• Outside Directorship 

• Crisis Communication 

• Court Attendance Costs

• EPL Entity Cover 

• Securities Entity Cover 

• Predetermined Allocation of Legal Costs

• Retroactive date – unlimited 

• Discovery Period 

• Spousal Liability  

• Legal Heirs and estates

• Investigation cost

• Emergency cost 

• Retired director cover

Directors and officers insurance - Major Exclusions

• Bodily Injury, Sickness, Disease, Death, or Damage / Destruction of   Property.\

• Seepage & Pollution or Contamination.

• War and Civil War Exclusion ; Radioactive Contamination Exclusion 

• Terrorism Exclusion 

• ADR/GDR Exclusion

• Prior and Pending ACT/ Litigation Exclusion at Inception

• Major Shareholder Suits Exclusion at 15-20% 

• Absolute BI / PD and Professional Indemnity  

• Future Securities Offering Exclusion 

• Fines and Penalties.

 • Insured vs Insured Claims

 • Punitive or exemplary damages 

• Exclusion due to underwriting considerations - Insurers may in addition to the standard exclusions, endorse the Policy with additional exclusions

Directors and Officers Insurance - Rating factors

Premium rating factors

1.Limit of indemnity 

2.Past financial/ claims history 

3.Asset size 

4.Organisational structure 

5.Geographical spread

 6.Jurisdiction / Territory 

7.Subsidiaries 

8.Recent profile(mergers/ takeovers etc.)

Directors and Officers Insurance - Underwriting

Documents required for underwriting

1. Completed Proposal Form 

2. In case of new company copy of Memorandum & Articles of Association of the Company 

3. In case of new company Last 2 year’s Audited financials  & current years projected 

4. Number of employees in case of Entity EPLI cover

5. Shareholding pattern 

6. Details of change in capital structure , if any

7. Past claims history, if any 

8.Expiring terms

Directors and Officers Insurance - Non preferred risks

Non preferred risks

• Financial Institutions: (Banks, Savings & Loan Institutions, Mortgage Lenders, Building Societies, Stockbrokers, Commodity Brokers, Mutual Funds, Unit Trust Managers, Investment/Fund Managers, Credit Unions, Friendly Societies, Venture Capitalist, Private Equity Firms & Insurance Brokers.

• Company with ADR/DGR Exposure.

• Stand alone EPLI (Employment Practice Liability Policies)

Does Financial liability product like D&O pay for Bodily Injury claims?

  • No
  • Yes
  • Will check and confirm

Does FGI market pre underwritten Professional indemnity products?

  • Yes
  • No
  • Will check and confirm

Can employee claim under D&O for say wrongful termination?

  • Yes
  • No
  • Will check and confirm

Were actions of Mr. Raju (founder of SATYAM) - a clear case of D&O liability?

  • No
  • Yes
  • Will check and confirm

Can wrong/ incorrect diagnosis be a basis for professional indemnity claim against a doctor?

  • Yes
  • No
  • Will check and confirm

Can Error committed by Clerk in chartered accountants office be a basis for claim in Professional Indemnity policy?

  • Yes
  • No
  • Will check and confirm

Can we underwrite standalone Employer Practice liability insurance?

  • No
  • Yes
  • Will check and confirm

Is Medical establishment E&O policy same as other E&O products?

  • Yes, however bodily injury exclusion is modified in hospital product
  • No
  • Will check and confirm

Events Insurance policy covers losses incurred by organizers due to cancellation of scheduled events and other miscellaneous covers.

Scope of Cover

Sections

1. EVENT CANCELLATION (Compulsory Section) 

2. PROPS, SET, STAGE and EQUIPMENTS 

3. PUBLIC LIABILITY 

4. PERSONAL ACCIDENT – DEATH & DISABILITY 

5. CASH IN TRANSIT & SAFE

Events insurance – S.1. Event cancellation

This Insurance is to indemnify the Insured for their Ascertained Net Loss should any Insured Event(s) be necessarily Cancelled due to

1. Loss or Damage to the venue due to Fire & Allied Perils and Earthquake, Flood, Cyclone. (Resulting in cancellation of the event)

2. Death of current Prime Minister, President of republic of India, Chief Minister of the state in which the event is being held, due to which National / State mourning is declared or any other prominent personality.

Warranty:

1 It is warranted that the insured has all the required permissions from the local authorities / government approvals etc. in place before the start of the event.

2 Alternate, appropriate and necessary arrangement is made to the venue so as to continue the event during seasonal climatic changes

“Ascertained Net Loss” means such amount in excess of any deductible stated in the Schedule as represents expenses which have been irrevocably expended in connection with the Insured Event(s) which have been necessarily Cancelled, Abandoned, Postponed, Interrupted, Curtailed or Relocated, less such part of the Gross Revenue retained less any savings the Assured is able to effect to mitigate such loss

Events insurance – S.2. Props, Sets, Stage

The Company agrees to indemnify the Insured against loss of or damage to the props, set, stage, equipments as declared in the insured production against the following coverage:

 1.Standard Fire and Special Perils 2.Earthquake 3.Burglary 4.Accidental external damage (direct physical loss or damage to the property from any external cause) whilst stored and or lying in the premises or whilst stored and or lying and/or erected at the site of event. 

Warrantee :

Proper fire fighting equipments, systems are installed at the venue, the local and nearest fire station is informed about the event and is on call, Escape exits are provided for at the venue, All pyrotechnics event (if any) are carried out by trained professionals only.

Events insurance – S.3. Public liability

The Company will indemnify the Insured against its legal liability (including Defence Costs) to pay Damages for third party civil claims arising out of Bodily Injury or Property Damage caused in the course of the Event by an Accident in the Premises where it is held and during the Policy Period if notified during the Policy Period in accordance with the terms of this Policy.

Warrantee: It is warranted that proper care is taken in installing the sets props and other infrastructure at the venue of the event and is carried out by trained professionals, as per approved plans of the local authorities

Events insurance – S.4. Personal Accident

We shall indemnify the Assured to the Limit of the Sum Assured or the percentage of the Sum Assured as specified in the Policy Schedule, if Assured will sustain Accidental Bodily Injury during the Policy Period, which results in one of the losses shown in the Table of losses below. The loss must occur within 12 months from the date of Accident, which caused the Injury.

Benefit chart is part of Policy document. 

Events insurance – S.5. Cash in Transit & Safe

The Company will indemnify the Insured for

1. the loss In Transit of money whilst carried by the Insured or its Employee, caused during the Policy Period by Robbery, theft or any other fortuitous event.

2. the loss of Money from a Safe and/or Strong Room in the premises mentioned in the Schedule caused by Burglary and/or Robbery and/or theft

Warranty:

1. It is warranted that Key (Duplicate /original ) should not be kept on the same premises where strong room/safe is located.

2. It is warranted that the Key(s) should be with nominated Named person (max two) only

3. It is warranted that the premises should have security guard 24 Hrs, preferably armed guard

Events Insurance - Major Exclusions

• the Assured's lack of care, diligence or prudent behaviour, the result of which would Increase the risk, and/ or likelihood of a loss, hereunder.

 • any contractual dispute or breach by the Insured or any Participant. 

• alterations or variance of Insured Event(s) without the prior written approval of the Company. 

• adverse weather in respect of any Insured Event(s) in the open or under canvas or in temporary structures unless agreed by the Company in writing and stated in the Schedule. 

• any work being carried out by builders or other contractors which renders the Venue or its facilities unusable in whole or in part, unless such work is unknown to the Assured at the inception of this Insurance or at the time of making the booking whichever is the later. 

• expenses and Gross Revenue which have not been declared to and agreed by the Company. 

• any reduction in attendance that is not specifically attributable to the  necessary Cancellation, Abandonment, Postponement, Interruption,  Curtailment or Relocation of the Insured Event(s).

• Refer policy wordings for complete list of exclusions

Wedding Insurance Policy

Scope of Cover

SECTION I- WEDDING CANCELLATION & POSTPONEMENT

SECTION II- DAMAGE TO PROPERTY

SECTION III- PERSONAL ACCIDENT (Death, PTD, PPD and Acci. Hosp.)

SECTION IV- MONEY (MONEY IN SAFE ONLY)

SECTION V- BURGLARY

SECTION VI- PUBLIC LIABILITY

Kindly refer policy wordings for conditions and exclusions

Cinema/ Film Insurance

Scope of Cover

SECTION-1: CAST INSURANCE – Death by accident & Critical Illness

SECTION -2: PROPS, SETS, WARDROBES & EQUIPMENTS – Fire perils, Burglary, Accidental external means

SECTION - 3: FILM NEGATIVE - Fire perils, Burglary, & during Transit

SECTION - 4: EXTRA EXPENSES – Due to named circumstances

SECTION - 5: PUBLIC LIABILITY – Property & Personal

SECTION - 6: NEGATIVE FILM INSURANCE – Post Production

SECTION - 7: PERSONAL ACCIDENT – Death & Disability

SECTION - 8: CASH IN TRANSIT - by Robbery, theft or any other fortuitous event.

Kindly refer policy wordings for conditions and exclusions

Clinical trial liability insurance

There are four parties involved in clinical trials and we will examine their role to understand their exposure to clinical liability suits and hence the need for clinical liability insurance.

The four parties are:-

i) The sponsor company testing the new products / procedure. Basically                                                                              the sponsoring company finances the entire trial.

ii) The Clinical Research Organization (CRO) that helps the sponsor  manage the study

iii) The institution where the study is actually carried out

iv) The professionals (clinicians) who actually conduct and monitor the study on behalf of the sponsor.

Whenever any new medicine/therapy is to be launched, it must first be tested in lab on animal or human cell. If the results are encouraging, then it is tested on human being in different phases. Each phase is designed to answer specific questions. Basically there are four phases of testing or trial. It should be understood that a clinical trial is a trial of some medicine on human being to know the efficacy of medicine as also to understand its side effect.

Clinical Trial Liability Insurance

Phase-I -This phase of the trial is meant to answer the question

Is the medicine/treatment safe? It tests the safety of the product, safe dosage and identification of side effects. This being the first trial on human beings, it is conducted on a small group of 20-50 volunteers.

Phase-II - It answers the questions –

Does it work? The experiment is carried out on a larger group of people (100 to 300) to further measure the efficacy, effectiveness and safety.

Phase-III - It answers the question –

Is it better than what is already available? –

The trial demonstrate large scale efficacy of medicine and is conducted on more than 1000 individuals across the countries / world. It is only after the drug is found suitable at phase-III that it is given license to be marketed.

Phase-IV - This phase designed to answer --- What else do we need to know?

The testing continues even after the drug is launched (post marketing) in the market to provide additional evidence of efficacy, effect on different segment of population, effect after long term use, etc.

Clinical Trial Liability Insurance

Insuring Clause

We will indemnify the Insured against all sums in excess of the Deductible that the Insured shall become liable to pay as damages or compensation and claimants costs and expenses in respect of any Claim made by Research Subjects for Bodily Injury caused by an Occurrence happening after the Retroactive Date within the Policy Territory and arising out of the Business of the Insured as stated in the Schedule.

Research Subject shall mean any person participating in a Trial including their dependants heirs executors administrators and legal representatives

Bodily Injury shall mean personal injury sickness disease or death and shall include but not by way of limitation mental injury mental anguish shock

Occurrence shall mean an accident or event including continuous or repeated injurious exposure to substantially the same general conditions which results during the Period of Insurance in Bodily Injury neither expected nor intended from the standpoint of the Insured

Clinical Trial Liability Insurance

Indemnity provided by policy is subject to -

(i) such Claim is first made in writing against the Insured during any                                                                           Period of Insurance and is notified to the  Underwriters during or within 30 days after expiry of the same Period of Insurance and

(ii) all Bodily Injury resulting or alleged to have resulted from the same Trial shall be considered as resulting from one Occurrence and having occurred during that Period of Insurance in which the first Claim is made against the Insured irrespective of the number of claimants or the period over which such Bodily Injury is likely to result in a Claim or Claims being made against the Insured at some future date and

(iii) the Insured has offered and the Research Subject has agreed to abide by the Conditions of Compensation and the Research Subject has agreed and accepted the amount of Compensation determined by an Independent Lawyer

The Underwriters will also pay Legal Costs which is included within the Limits of Indemnity

Exclusions – Occurrence prior to Retroactive date, Claims related to conditions like Hepatitis, LAV, HIV, AIDS, TSE, and CJD. 

Commercial Crime Insurance

Insurance Cover

The insurer shall indemnify the insured for their loss sustained at any time resulting from either:

(A) fraud or dishonesty committed by any employee – part time, temporary, permanent, etc (acting alone or in collusion with others); or

(B) a fraudulent act committed by any other person;

which is committed with the principal intent to cause the insured to sustain such loss and is first discovered by the insured during the policy period or the discovery period (Claims Made Policy).

Definitions

1. Any other person means any natural person who:

(i) is not a director, officer, partner, trustee or employee of any insured; and

(ii) does not have and does not provide services under any contract for services, written or implied, with any insured; and

(iii) is not in collusion with any employee.

Commercial Crime Insurance

Definitions

2. Loss means the direct financial loss sustained by the insured arising from or in connection with any single act or series of related, continuous or repeated acts (which shall be treated as a single act). Loss shall not include salaries, commissions, fees, bonuses, promotions, awards, profit sharing, pensions or other employee benefits paid by the insured where earned in the normal course of employment.

Loss does not mean any loss resulting from or amounting to:

(i) any dealing or trading in securities, commodities, futures, options, foreign or federal funds, currencies, foreign exchange and the like unless such loss is covered under Insurance Cover 1 (A) and results in the employee making improper financial gain for themselves or for any other individual or organisation intended by such employee to receive such benefit; or

(ii) any reckless or inadvertent acts; or

(iii) the creation of a liability to a third party other than as provided under Standard Extension 4.1.                     (Care Custody and Control)

Commercial Crime Insurance - Extensions

Standard Extensions

 1. Care custody and control 

2. Fees, costs and expenses : Legal fees ; use of investigating specialists;  reconstruction cost (up to lesser of 1.5 Cr / 5% of limit always within policy limits)

3. Money or securities – damage, destruction or disappearance (Up to 1.5 Cr) 

4. New entities – newly created or acquired 

Optional Extensions

1. Criminal damage (Up to 1.5 Cr) 

2. Interest receivable or payable (Up to 15% of policy limit) 

3. Violent and forcible theft of property by any other person (Up to 1.5 Cr)

Commercial Crime Insurance - Exclusions

Exclusions

1. Consequential Loss

2. Credit risks 

3. Directors/ Partners (where not acting within definition of employee)

4. Employee (where act is not covered by Insuring clause/ extensions) 

5. Fees, costs, expenses (which are not covered by standard extension)

6. Fines, penalties, damages 

7. Fire (unless covered by standard extension 4.3) 

8. Loss sustained after knowledge (of employees current or past fraudulent actions)

9. Major shareholder (more than 5%) 

10. Non violent crime (unless covered under Insuring clause/ extensions)

11. Premises damage 

12. Prior or subsequent discovery of loss

13. Profit, loss or inventory computation (covered as per Insuring clause if evidence of employee involvement is made available)

14. Proprietary information, trade secrets and intellectual property 

15. Violent crime by any individual or organisation (unless covered under Insuring clause/ extensions) 

16. Voluntary exchange or purchase

17. Radioactivity and nuclear risks, war and terrorism risks

Does Commercial crime insurance provide wider cover than fidelity guarantee?

  • Yes
  • No
  • Will check and confirm

Is there a difference between Events Insurance and Wedding Insurance?

  • Yes, wedding insurance covers postponement also
  • Yes, wedding insurance offers wider cover
  • Both statements are correct

Is Clinical Trial Liability Insurance required even if the hospital where trial is conducted has a Error and Omission policy?

  • Yes
  • No
  • Will check and confirm

Is Damage to premises covered under Commercial crime Insurance?

  • NO
  • Yes
  • Will check and confirm

Are there other/ more products in Liability LOB?

  • Yes for example Cyber Crime Insurance
  • Yes for example Media Liability Insurance
  • Both statements are correct

Concluding remarks

Hope you enjoyed the content and learnt some bit. Please remember this is just the start and not the destination. Request is to refer policy documents, III and CII material on Liability to further enhance your understanding of this fast evolving line of business. 

Repetition by way of prospecting will help you develop even better understanding.

Hope to meet a better you, soon.