This article on the difference between Director & officer’s insurance policy and Keyman insurance is written by Tusharika Bhattacharya, pursuing Diploma in Entrepreneurship Administrative and Business Law from NUJS, Kolkata.
WHAT IS A KEYMAN INSURANCE POLICY?
Keyman Insurance policy is defined as an insurance policy where the proposed, as well as the premium payer, is the employer, the life which is to be insured . The KEYMAN can be denoted as any person employed by the company having special skill and who contributes to the profits. Keyman insurance is a term that is used to protect the company which is suffering from any financial loss if an employee or director who is critical to a company. It means that key employee must not be necessarily a man and can be a woman also. It is a term that states that the entire premium is treated as a premium. Unlike, an individual who himself pays the premium, in this case, the premium is paid by the company and it is treated as business income. Some businesses have excessive dependency on particular executives who are extremely important for the smooth functioning of the business. It is seen that their absence can cause huge losses to the company. Therefore, companies opt for the key man insurance policy .
WHO IS A KEY MAN?
The following are the keyman whose loss can cause a financial strain to the company
They could be any of the following
Directors of a Company, Key People in sales, Key Project Managers People with Specific Skills
ADVANTAGES OF A KEY MAN INSURANCE POLICY:
- In the case of death of a keyman the company gets money to cope up with the losses
- If a company buys the keyman insurance for its employee, the premium paid for the policy as a business expense under section 37(1).
- The policy can be used as exgratia payment or superannuation benefit to the key employee during the service period.
- For the executives earning salaries, this policy can be granted as a hike in salary.
- Insulation of risk of financial loss against loss of a keyman
- Premiums paid by the company on the life of the keyman would not be treated as perquisites
DISADVANTAGES OF A KEYMAN INSURANCE POLICY:
- The amount of claim or maturity under the keyman insurance policy is exempt under section 10 (10)D if the company already pays the premiums.If the case is paying the premiums, then the claim proceeds are exempt u/s 10(10)D
- If the policy is surrendered, then the amount that comes in hand is taxable as profit in lieu of salary
DIRECTORS AND OFFICERS INSURANCE LIABILITY
While carrying out the business activities , every business is required that it complies with provisions of applicable statutes like company, tax law, labour laws , specific regulations pertaining to the sector, Most companies impose levy a fine on the company as well as its directors .So before knowing in detail what is director and insurance policy , we need to know the following questions:
1.What is a D&O policy and in what situations can it be obtained ?
2.What are the types of D&O insurance policy ?
3.Key terms of D&O insurance policy?
WHAT IS DIRECTORS AND OFFICERS LIABILITY INSURANCE ?
Under Indian law, a company cannot indemnify . however, it may obtain D&O insurance for its directors and key officers , which is not covered by the prohibition .Insurance against liability that is incurred Directors and key officers who are in key decision making .The directors and officers in pursuance of their duties which may be aken in violation of statutory laws. A Director and officers liability insurance will typically not insure against fraudulent and deliberate acts.
Despite of their possibility of mitigating the liability , it is seen that in such cases, a complainant would make the directors of the proceedings liable. This entails that the director will have to participate in the court proceedings . Investors typically ensure that the nominee directors are appointed as non-executive nominee directors. They may require such positions in the companies records such as
- Minutes of the meeting and text of the resolution
- The register of documents
- The relevant documents which include DIR-8 and documents filed with registrar
We know that director and officers can be useful in minimizing risks. Before a company considers a D&O policy, it ha to take the following reasons:
- Which persons will be covered by this policy?
- What kinds of defaults are covered?
- Are the liabilities arising out of default but are detected when the company has taken insurance covered under this liability
- The liability arising from a default, but which was discovered after its expiry of the policy covered ?
- What is the level of control that insurer has over legal proceedings?Can a company appoint a counsel ?
Under Indian law, a company cannot indemnify directors. However, it may obtain D&O Insurance which is not covered by the insurance. This liability which is incurred in the course of business helps the company in attracting as the directors , most of the Indian statutes impose a fine in case of breach of their provisions, it makes it utmost useful in the interest of the company to obtain insurance with respect to both possibilities.
A D&O insurance policy is of multiple types-it can insure the director against losses . A D&O Policy is of many types-it can insure the director against losses, fines or losses if an A-side is to be taken with respect to such a situation , the premium will be paid by and the amounts in and any amount will be paid by the company and any amount paid to the insurer. C-side coverage is taken for the company that any
What kind of defaults are not covered under D&O are covered ?
1.Dishonest and fraudulent
2.Various regulatory statutory
3.Punitive damages :
HOW DOES A GOOD INSURANCE HELP?
With the introduction of more regulation in corporate governance, there should be protection and relief for the affected parties,
It offers help as stated below:
- Improve the company’s ability to recruit directors and officers who are qualified to be. Directors designated are beginning to insist on a good D&O policy before assuming duties. With the sweeping changes in the profile and the responsibilities of the directors, it is becoming increasingly necessary for the persons intending to become directors to seek protection in some form or the other.
2. Enhancing the defence of claims and reduce potential discover
- The increase in public interest litigations, environmental petitions and customer grievances, which would result in the risk of civil liability claims and litigation against directors and officers increasing considerably.
Globalization has resulted in Indian companies, particularly from the knowledge-based sectors, increasingly accessing the global markets for capital as well as acquiring and setting up companies in other countries. A director and liability is for a person who will run public sector organizations broadly run the same risks as their counter parts in the private sector. A director and officer liability insurance is not a replacement for a sound management and corporate governance. It is stakeholder’s interest and not only shareholders interest that would dictate future direction of the corporate governance and directors which is needed to ring-fence their liabilities with an appropriate D&O policy.
D&O FOR SMALL AND MEDIUM ENTERPRISES:
Today, the businesses operate in a fast –moving and dynamic environment. Management is closely involved in the day to day operations and business decisions have to be made in the spot. Such entrepreneurial can have dangerous downside as well. Because the management is associated with in daily operations and is often making key decisions, small entrepreneurs, managers, are extremely vulnerable to lawsuits from regulators, shareholders.
- D&O CLAIMS:
SEBI fined RIL in the case where it violated the SEBI takeover’s regulations with respect to Ril’s holding in cement and engineering major L&T. D&O does not pay fines and penalties but investigation which is substantial can be covered under the D&O policy.
Business partner’s claim:
ICICI Bank had lodged a complaint under the D&O policy for INR 250 million as an outcome of an ongoing battle initiated by Commmerzbank.The case is related to funding of Arvind Mills by ICICI bank. Commerzbank . Commerzbank had objections to this funding, the claim was filed for recovery of expenses.
The ex-director who had claims on subhiksha case:
Premji invest was a private owned equity fund owned by Azim Premji , the billionaire chairman of wipro admitted that they were taken on a ride. The investment banking sources was understood that it was misled on the true financial position of subhiksha, which prompted it to sent notices to the other directors on Subhiksha ‘s board
DIFFERENCE BETWEEN DIRECTOR AND OFFICER INSURANCE AND KEYMAN INSURANCE
A keyman insurance policy insures the business from loss, if the key executives who are unable to serve the business. For example, Apple computers could obtain keyman insurance to insure against the premature death of steve jobs. On the other hand, a D&O policy insures the company against legal liabilities imposed while performing his duties.
The amount of loss incurred depends on the the conduct of proceedings because hiring an expensive legal counsel may increase legal costs , it may improve the chances of acquittal , it is essential to be aware of the level of control.
If the insurers has agreed to pay the amounts during the pendency of legal proceedings, it may expect to have a high level of control- such as appointment of counsels
Consider the following clauses:
- A clause which require consent of the insurer for incurring any expenses and settlement of legal proceedings. No charges, costs, insurers shall be incurred against made without insurer’s consent.
- A clause which provides the insurer the discretion to insure the amount to pay the amounts during the legal insurer.
D&O protect personal assets of individual directors and officers, and therefore, senior managers must take steps to ensure employer purchase effective coverage. In today’s volatile markets, adequate D&O cover is essential.