OVERVIEW OF DIRECTORS AND OFFICERS LIABILITY INSURANCE
Define Directors and Officers Insurance Liability Insurance.
A type of liability insurance which provides financial protection for directors and officers by advancing legal expenses arising from alleged or actual wrongful acts committed while performing their corporate duties.
Legal expenses include, but are not limited, to the following:
Define Directors.
Directors – the corporate powers of all corporations shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees to be elected from among the holders of stocks, or where there is no stock, from among the members of the corporation, who shall hold office for one (1) year until their successors are elected and qualified.
Every director must own at least one (1) share of the capital stock of the corporation of which he is a director, which share shall stand in his name on the books of the corporation. Any director who ceases to be the owner of at least one (1) share of the capital stock of the corporation of which he is a director shall thereby cease to be a director. Trustees of non-stock corporations must be members thereof. A majority of the directors or trustees of all corporations organized under this Code must be residents of the Philippines. (Corporation Code of the Philippines or Batas Pambansa Bilang 68, Section 23)
What are the three-fold duties of a director?
What is Business Judgement Rule?
The courts are barred from intruding into business judgments of corporations, when the same are made in good faith.
Courts and other tribunals wont override the business judgment of the board mainly because, courts are not in the business of business, and the laissez faire rule or the free enterprise system prevailing in our social and economic set-up dictates that it is better for the State and its organs to leave business to the businessmen; especially so, when courts are ill-equipped to make business decisions. More importantly, the social contract in the corporate family to decide the course of the corporate business has been vested in the board and not with courts. (Cesar L. Villanueva, Philippine Corporate Law, 1998 Ed., p. 228.)
In the case of Montelibano vs Bacolod-Murcia Milling Co. Inc. (G.R. No. L-15092, May 18, 1962), the Supreme Court said "As the resolution in question was passed in good faith by the board of directors, it is valid and binding, and whether or not it will cause losses or decrease the profits of the central, the court has no authority to review them.
They hold such office charged with the duty to act for the corporation according to their best judgment, and in so doing they cannot be controlled in the reasonable exercise and performance of such duty. Whether the business of a corporation should be operated at a loss during depression, or close down at a smaller loss, is a purely business and economic problem to be determined by the directors of the corporation and not by the court. It is a well-known rule of law that questions of policy or of management are left solely to the honest decision of officers and directors of a corporation, and the court is without authority to substitute its judgment of the board of directors; the board is the business manager of the corporation, and so long as it acts in good faith its orders are not reviewable by the courts. (Fletcher on Corporations, Vol. 2, p. 390).
Define Officers.
Officers - for one to be considered as a corporate officer, the position must, if not listed in the by-laws, have been created by the corporation's board of directors, and the occupant thereof appointed or elected by the same board of directors or stockholders. The president, vice president, secretary and treasurer are commonly regarded as the principal or executive officers of a corporation, and modern corporation statutes usually designate them as the officers of the corporation. However, other offices are sometimes created by the charter or by-laws of a corporation, or the board of directors may be empowered under the by-laws of a corporation to create additional offices as may be necessary. (Tabang v. National Labor Relations Commission, [G.R. No. 121143. January 21, 1997])
Define Wrongful Acts.
Wrongful Acts - refer to the corporate acts of the directors and officers that can lead to a claim. It shall include any error, misstatement, misleading statement, neglect, libel, slander, breach of trust, breach of warranty of authority or breach of duty committed, attempted, or allegedly committed or attempted by the insured in his capacity the director or officer or with respect to the purchase or sale of, or offer to purchase or sell, any securities of the insured organization.
It shall also include any actual or alleged wrongful or unfair, employment-related: discipline, dismissal, denial of natural justice, discharge or termination of employment, breach of any oral, written or implied employment contract, misrepresentation, discrimination, harassment, sexual harassment, failure to employ or promote, deprivation of a career opportunity, failure to grant tenure, demotion, evaluation, invasion of privacy, defamation, infliction of emotional distress.
Define Damages.
Damages listed under the Philippine Civil Code are the following:
Can moral damages be awarded in favor of a corporation?
No. Because they do not have feelings and mental state. They cannot even claim moral damages for besmirched reputation. Mental suffering can only be experienced by one having a nervous system and it flow from real ills, sorrows and grief of life – all of which cannot be suffered by an artificial person. (National Power Corporation vs Philipp Brothers Oceanic Inc, (GR No 126204, [November 20, 2001])
Why is Directors and Officers Liability Insurance necessary?
What are the standard insuring clauses?
Who may be insured under a Directors and Officers Insurance Liability Insurance?
The following may be covered under the policy:
What are the key underwriting factors?
The following are the key underwriting data:
Discuss the Trust Fund Doctrine.
The capital stock, property and other asset of the corporation are regarded as equity in trust for the payment of corporate creditors. The corporation may dissipate this and creditors may sue stockholders directly for the unpaid subscription. (Phil. Trust Co vs Rivera, 44 Phil 469 [1923])
Discuss the Veil of Corporate Fiction.
It means a corporation is legal entity separate and distinct from the persons composing it. Therefore, as a general rule, the corporate acts of the directors and officers is the act of the corporation they represent. But when the same is used as a shield to perpetrate fraud, this fiction can be disregarded and individuals composing it will be treated identically.
The doctrine is normally invoked to make the directors and officers liable for the obligations of the corporation. However, it cannot be used to make the corporation liable for the personal obligations of the directors and officers. (Francisco Motors vs. Court of Appeals [309 SCRA 72])
What is an ultra-vires act?
Is one committed outside of the object for which a corporation is created and defined by the law of its organization and therefore beyond the power conferred upon it by law. (Atrium Management Corporation vs Court of Appeals, No 109491, February 28, 2001)
If it is the director or officer who committed an act that is not within his powers, it is not an ultra-vires acts of the corporation rather is referred to as ultra-vires acts of the officer, or simply unauthorized acts.
Differentiate ultra-vires acts versus illegal acts?
The former is merely voidable which may be enforced by performance, ratification or estoppel while the latter is void and cannot be validated. (Atrium Management Corporation vs Court of Appeals, No 109491, February 28, 2001.)
A type of liability insurance which provides financial protection for directors and officers by advancing legal expenses arising from alleged or actual wrongful acts committed while performing their corporate duties.
Legal expenses include, but are not limited, to the following:
- Reasonable lawyer’s fees
- Awards of damages by courts in case the insured losses
- Cost of bonds
- Cost of settlement in case the parties decide to settle amicably
Define Directors.
Directors – the corporate powers of all corporations shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees to be elected from among the holders of stocks, or where there is no stock, from among the members of the corporation, who shall hold office for one (1) year until their successors are elected and qualified.
Every director must own at least one (1) share of the capital stock of the corporation of which he is a director, which share shall stand in his name on the books of the corporation. Any director who ceases to be the owner of at least one (1) share of the capital stock of the corporation of which he is a director shall thereby cease to be a director. Trustees of non-stock corporations must be members thereof. A majority of the directors or trustees of all corporations organized under this Code must be residents of the Philippines. (Corporation Code of the Philippines or Batas Pambansa Bilang 68, Section 23)
What are the three-fold duties of a director?
- Duty of Obedience - A director must act within the corporate powers of the corporation.
- Duty of Loyalty - A director or trustee shall be personally liable if they. a. Willfully and knowingly vote for or assent to patently unlawful acts of the corporation, b. Are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees c. Attempts to acquire or acquire, in violation of his duty, any interest adverse to the corporation in respect of any matter which has been reposed in him in confidence, as to which equity imposes a disability upon him to deal in his own behalf, he shall be liable as a trustee for the corporation and must account for the profits which otherwise would have accrued to the corporation, d. Where a director, by virtue of his office, acquires for himself a business opportunity which should belong to the corporation, thereby obtaining profits to the prejudice of such corporation, he must account to the latter for all such profits by refunding the same, unless his act has been ratified by a vote of the stockholders owning or representing at least two-thirds (2/3) of the outstanding capital stock. (Corporate Code of the Philippines, Section 31-34)
- Duty of Diligence - A director must always act in good faith and with the best interest of the company and shareholders in mind. Such duty is discussed in the Business Judgement Rule.
What is Business Judgement Rule?
The courts are barred from intruding into business judgments of corporations, when the same are made in good faith.
Courts and other tribunals wont override the business judgment of the board mainly because, courts are not in the business of business, and the laissez faire rule or the free enterprise system prevailing in our social and economic set-up dictates that it is better for the State and its organs to leave business to the businessmen; especially so, when courts are ill-equipped to make business decisions. More importantly, the social contract in the corporate family to decide the course of the corporate business has been vested in the board and not with courts. (Cesar L. Villanueva, Philippine Corporate Law, 1998 Ed., p. 228.)
In the case of Montelibano vs Bacolod-Murcia Milling Co. Inc. (G.R. No. L-15092, May 18, 1962), the Supreme Court said "As the resolution in question was passed in good faith by the board of directors, it is valid and binding, and whether or not it will cause losses or decrease the profits of the central, the court has no authority to review them.
They hold such office charged with the duty to act for the corporation according to their best judgment, and in so doing they cannot be controlled in the reasonable exercise and performance of such duty. Whether the business of a corporation should be operated at a loss during depression, or close down at a smaller loss, is a purely business and economic problem to be determined by the directors of the corporation and not by the court. It is a well-known rule of law that questions of policy or of management are left solely to the honest decision of officers and directors of a corporation, and the court is without authority to substitute its judgment of the board of directors; the board is the business manager of the corporation, and so long as it acts in good faith its orders are not reviewable by the courts. (Fletcher on Corporations, Vol. 2, p. 390).
Define Officers.
Officers - for one to be considered as a corporate officer, the position must, if not listed in the by-laws, have been created by the corporation's board of directors, and the occupant thereof appointed or elected by the same board of directors or stockholders. The president, vice president, secretary and treasurer are commonly regarded as the principal or executive officers of a corporation, and modern corporation statutes usually designate them as the officers of the corporation. However, other offices are sometimes created by the charter or by-laws of a corporation, or the board of directors may be empowered under the by-laws of a corporation to create additional offices as may be necessary. (Tabang v. National Labor Relations Commission, [G.R. No. 121143. January 21, 1997])
Define Wrongful Acts.
Wrongful Acts - refer to the corporate acts of the directors and officers that can lead to a claim. It shall include any error, misstatement, misleading statement, neglect, libel, slander, breach of trust, breach of warranty of authority or breach of duty committed, attempted, or allegedly committed or attempted by the insured in his capacity the director or officer or with respect to the purchase or sale of, or offer to purchase or sell, any securities of the insured organization.
It shall also include any actual or alleged wrongful or unfair, employment-related: discipline, dismissal, denial of natural justice, discharge or termination of employment, breach of any oral, written or implied employment contract, misrepresentation, discrimination, harassment, sexual harassment, failure to employ or promote, deprivation of a career opportunity, failure to grant tenure, demotion, evaluation, invasion of privacy, defamation, infliction of emotional distress.
Define Damages.
Damages listed under the Philippine Civil Code are the following:
- Actual or compensatory - Except as provided by law or by stipulation, one is entitled to an adequate compensation only for such pecuniary loss suffered by him as he has duly proved.
- Moral - include physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and similar injury. Though incapable of pecuniary computation, moral damages may be recovered if they are the proximate result of the defendant's wrongful act for omission. Moral damages may be recovered in the following and analogous cases: a. A criminal offense resulting in physical injuries; b. Quasi-delicts causing physical injuries; c. Seduction, abduction, rape, or other lascivious acts; d. Adultery or concubinage; e. Illegal or arbitrary detention or arrest; f. Illegal search; f. Libel, slander or any other form of defamation; g. Malicious prosecution; h. Acts mentioned in article 309; I. Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34, and 35.
- Nominal - are adjudicated in order that a right of the plaintiff, which has been violated or invaded by the defendant, may be vindicated or recognized, and not for the purpose of indemnifying the plaintiff for any loss suffered by him.
- Temperate or moderate - are damages, which are more than nominal but less than compensatory damages, may be recovered when the court finds that some pecuniary loss has been suffered but its amount can not, from the nature of the case, be provided with certainty.
- Liquidated - are those agreed upon by the parties to a contract, to be paid in case of breach thereof. Liquidated damages, whether intended as an indemnity or a penalty, shall be equitably reduced if they are iniquitous or unconscionable. When the breach of the contract committed by the defendant is not the one contemplated by the parties in agreeing upon the liquidated damages, the law shall determine the measure of damages, and not the stipulation.
- Exemplary or corrective - are imposed, by way of example or correction for the public good, in addition to the moral, temperate, liquidated or compensatory damages.
Can moral damages be awarded in favor of a corporation?
No. Because they do not have feelings and mental state. They cannot even claim moral damages for besmirched reputation. Mental suffering can only be experienced by one having a nervous system and it flow from real ills, sorrows and grief of life – all of which cannot be suffered by an artificial person. (National Power Corporation vs Philipp Brothers Oceanic Inc, (GR No 126204, [November 20, 2001])
Why is Directors and Officers Liability Insurance necessary?
- A director and officer can be held personally liability for his corporate acts
- There is no guarantee that your company will always be behind your back.
- Suits can be costly. In the Philippines, cases notoriously take years or decades to conclude
- Suits can happen long after a director or officer has left the company
- To protect the insured's personal assets from an adverse court decision
What are the standard insuring clauses?
- Insuring Clause A refers to the section of the policy which will cover the reasonable legal expenses incurred by the directors and key officers in case the organization they represent is already insolvent, simply refuses to pay the claim, or the organization are prohibited by law from advancing the defense cost of their directors and officers.
- Insuring Clause B refers to the section of the policy which will cover the legal expenses advanced by the insured organization on behalf of its directors and officers. This insuring clause protects the company's balance sheet, and in this respect is no different from a property policy, which also similarly provides balance sheet protection. (Peter R. Taffae, The ABCs of D&O Insurance Clauses)
- Insuring Clause C refers to the section of the policy which will cover the legal expenses of the insured organization itself arising Securities Claims. It shall include any error, misstatement, misleading statement, neglect, libel, slander, breach of trust, breach of warranty of authority or breach of duty committed, attempted, or allegedly committed or attempted by the insured in his capacity the director or officer or with respect to the purchase or sale of, or offer to purchase or sell, any securities of the insured organization.
- Insuring Clause D refers to the section of the policy which will cover the legal expenses of the insured organization itself arising Employment Practices Claims. It is type of liability insurance that covers corporate acts in connection with employment-related matters. The most frequent types of claims covered under this section of the D&O policy includes: illegal termination or dismissal, discrimination, and sexual harassment.
Who may be insured under a Directors and Officers Insurance Liability Insurance?
The following may be covered under the policy:
- Past, present, and future directors and key officers of the insured organization and it subsdiaries
- Past, present, and future directors and key officers of the named insured organization’s existing and future subsidiaries.
- Spouse of the directors and officers as long as the suit is connected with the corporate acts of the insured.
- Heirs and legal representatives in case the insured director becomes incapacitated and unable to personally defend himself in court.
- The organization itself relative to Securities and Employment Practices Claims.
What are the key underwriting factors?
The following are the key underwriting data:
- Nature of business
- Type of company. Is the applicant private or publicly-listed? Startup or established? Financial institution or not?
- Financial health of the company. Is the applicant liquid, solvent or profitable or otherwise?
- Size of the company
- Where the company operates. Do they operate in litigious jurisdictions or not?
- Claims history – the frequency and/or severity thereof.
Discuss the Trust Fund Doctrine.
The capital stock, property and other asset of the corporation are regarded as equity in trust for the payment of corporate creditors. The corporation may dissipate this and creditors may sue stockholders directly for the unpaid subscription. (Phil. Trust Co vs Rivera, 44 Phil 469 [1923])
Discuss the Veil of Corporate Fiction.
It means a corporation is legal entity separate and distinct from the persons composing it. Therefore, as a general rule, the corporate acts of the directors and officers is the act of the corporation they represent. But when the same is used as a shield to perpetrate fraud, this fiction can be disregarded and individuals composing it will be treated identically.
The doctrine is normally invoked to make the directors and officers liable for the obligations of the corporation. However, it cannot be used to make the corporation liable for the personal obligations of the directors and officers. (Francisco Motors vs. Court of Appeals [309 SCRA 72])
What is an ultra-vires act?
Is one committed outside of the object for which a corporation is created and defined by the law of its organization and therefore beyond the power conferred upon it by law. (Atrium Management Corporation vs Court of Appeals, No 109491, February 28, 2001)
If it is the director or officer who committed an act that is not within his powers, it is not an ultra-vires acts of the corporation rather is referred to as ultra-vires acts of the officer, or simply unauthorized acts.
Differentiate ultra-vires acts versus illegal acts?
The former is merely voidable which may be enforced by performance, ratification or estoppel while the latter is void and cannot be validated. (Atrium Management Corporation vs Court of Appeals, No 109491, February 28, 2001.)
CLAIMS
Who may sue the Directors and Officers?
As a director of a company, he can be held personally liable for his corporate acts. He is exposed to suits from any of the following:
What is Claims Made Policy? How does it work?
A D&O policy is typically a claim-made policy. Under a claims-made policy covers claims made against an insured during the policy period in connection with a wrongful act.
The wrongful act of the insured that leads to the claim may take place prior to the policy period or what we refer to as the retroactive date.
What triggers the policy is the claim made against an insured by a third party, and not the claim against the insurer by the insured, during the policy period. The claim against the insurer must be made while the policy is in effect.
What is a retroactive date?
Retroactive date refers to the cut-off date for wrongful acts that will be covered by the policy.
A D&O policy will cover a claim arising from a wrongful acts committed prior to the existing period of insurance, provided, it was committed after the retroactive date. In addition, the claim must be filed with the insurer while the policy is still in force but in no case beyond the extended reporting period.
ABC Company secured a D&O Liability Insurance with the following details:
Period of insurance: January 1, 2013 – January 1, 2014
Retroactive date: January 1, 2008.
On June 15, 2013, ABC Company filed a claim emanating from a wrongful act committed on January 15, 2008.
Is the claim compensable?
Yes. While the wrongful act was committed 5 years prior to the period of insurance, it was nevertheless committed after the retroactive date.
What if the insurer was notified on March 15, 2014 instead of June 15, 2013?
No. While the wrongful act was committed after the retroactive date, the claim will be considered time-barred. The claim must filed with the insurer during the policy period or extended reporting period of 30 days in case of non-renewal.
When should the claim be filed?
The claim must be filed in writing within the policy period or the 90 days extended reporting period.
What is a Circumstance?
It refers to an event which an insured director reasonably expects to ripen to a claim in the future.
A notice of Circumstances must include the following information:
Immediate compliance with the requirements on the filing of a circumstance is a must because there is a great chance the insurer or reinsurer will exclude it on the renewal policy. Once excluded in the renewal policy policy and the circumstance was not lodged in current policy, the insured may lose coverage related to the circumstance in both the existing and renewal policy.
How does a Circumstance differ from a Claim?
A Claim means:
What must a notice of Claim include?
A notice of claim must include the following information:
What is the effect of filing a Circumstance?
By filing a notice of circumstances, the D&O policy that will respond is the policy in effect when the notice of circumstance was filed and not the renewal or existing D&O policy when the notice of claim was subsequently filed. In effect, the renewal or existing policy will be reserved for new D&O claims that may arise in the future.
What does a D&O policy pay?
They are as follows:
What are the pre-requisites for the settlement of a D&O Claim?
They are as follows:
What constitutes reasonable Defense Cost?
Defense Cost means that part of loss consisting of reasonable costs, charges, fees (including but not limited to legal counsels’ fees and experts’ fees) and expenses (other than regular or overtime wages, salaries or fees of the directors, officers or employees of the Insured Organization or office overheads, travel costs unrelated to any claim or other administration costs) incurred in defending, investigating, settling or appealing any Claim and the premium paid for appeal, attachment, bail or similar bonds.
Defense Cost shall also include reasonable costs, charges or fees resulting from an Insured lawfully opposing, challenging, resisting or defending against any request for or any effort to obtain the extradition of such Insured or appealing any order or other grant of extradition of such Insured.
Despite the presence of a D&O policy, the insured is expected to act as a prudent un-insured. As such, the insured should ensure that the legal expenses should not be exorbitant or excessive.
Defense counsel fees and expenses should accurately reflect the cost of the work necessary to defend or to resolve the claim. Consequently, acceptance fee is not covered if it is not based on actual services rendered. Acceptance fees should be treated like mobilization fees or downpayment in a construction project. It must be liquidated and contractor must show it is being spent for the project. In the case of the legal counsel, they must show the amount of time spent in drafting the pleading and preparing the legal opinion on the merits of the suit filed against the insured, at the very least.
In addition, the following shall not be reimbursed by us:
All of the above are considered part of the firm’s overhead expenses.
In case of a claim, it is advised that prior consultation with a legal counsel or a professional insurance intermediary is obtained in order to protect an insured's rights under the policy.
What are the major D&O Exclusions?
Cite some laws wherein a director or officers can be held personally liability for his acts.
Under BP 22 or Bouncing Checks Law, if the company is found to have violated the said law, the signatories to the check can be held liable for the payment of the amount of the check that bounced.
Under the Corporation Code, obligations incurred by directors and officers, acting as such corporate agents are not theirs, but the direct accountabilities of the corporation they represent. However, they may be held civilly liable in the following instances:
Under the Labor Code, violator of its provision declared to be unlawful or penal in nature shall be punished with a fine of not less than Php1,000 nor more than Php10,000 or imprisonment of not less than 3 months nor more than 3 years or both, at the discretion of the court.
The Labor Code further provides if the offense is committed by a corporation, the penalty shall be imposed upon the guilty officers of such corporation.
The Supreme Court has held in a number of cases that corporate directors and officers shall be solidarily liable with the corporation for the termination of employment of employees done with malice or in bad faith.
Under the General Banking Law, in the event that the acts of directors and/or officers of the bank constitute “conducting business in an unsafe or unsound manner”, they can be held civilly liable.
Under the Securities Regulation Code, a person found in violation thereof may be subject to the following sanctions:
Can the director claim for reimbursement the cost and expenses he incurred relative to a suit he instituted?
No. D&O will only respond if the cost and expenses were incurred in defense of his self and not when he is the one who institutes the suit.
Will a D&O policy respond if the claim is arising from a criminal act?
Yes, but the policy benefits shall be limited to legal expenses only until there is a guilty verdict. The rationale behind this is that a director, like any other accused, is entitled to presumption of innocence.
As a director of a company, he can be held personally liable for his corporate acts. He is exposed to suits from any of the following:
- Investors – due to mismanagement of corporate assets or imprudent investment leading to sharp decline of share prices.
- Employees – due to allegation of unfair dismissal, discrimination, sexual harassment, or violation of any employment rights.
- Customers – due to a misrepresentation relative to the product being sold to the public.
- Regulators – in case public interest requires, regulators may inquire into the affairs of the company.
- Competitors – due to allegations by a competitor of anti-competitive practices or commission of smear campaign against a competitor’s products.
What is Claims Made Policy? How does it work?
A D&O policy is typically a claim-made policy. Under a claims-made policy covers claims made against an insured during the policy period in connection with a wrongful act.
The wrongful act of the insured that leads to the claim may take place prior to the policy period or what we refer to as the retroactive date.
What triggers the policy is the claim made against an insured by a third party, and not the claim against the insurer by the insured, during the policy period. The claim against the insurer must be made while the policy is in effect.
What is a retroactive date?
Retroactive date refers to the cut-off date for wrongful acts that will be covered by the policy.
A D&O policy will cover a claim arising from a wrongful acts committed prior to the existing period of insurance, provided, it was committed after the retroactive date. In addition, the claim must be filed with the insurer while the policy is still in force but in no case beyond the extended reporting period.
ABC Company secured a D&O Liability Insurance with the following details:
Period of insurance: January 1, 2013 – January 1, 2014
Retroactive date: January 1, 2008.
On June 15, 2013, ABC Company filed a claim emanating from a wrongful act committed on January 15, 2008.
Is the claim compensable?
Yes. While the wrongful act was committed 5 years prior to the period of insurance, it was nevertheless committed after the retroactive date.
What if the insurer was notified on March 15, 2014 instead of June 15, 2013?
No. While the wrongful act was committed after the retroactive date, the claim will be considered time-barred. The claim must filed with the insurer during the policy period or extended reporting period of 30 days in case of non-renewal.
When should the claim be filed?
The claim must be filed in writing within the policy period or the 90 days extended reporting period.
What is a Circumstance?
It refers to an event which an insured director reasonably expects to ripen to a claim in the future.
A notice of Circumstances must include the following information:
- Factual description of circumstances which could give rise to a claim
- Details of the Insured
- Details of the Wrongful Act
- Details of potential damage
- Details of the third party who may file a claim, and
- Details of when the Insured became aware of the circumstances.
Immediate compliance with the requirements on the filing of a circumstance is a must because there is a great chance the insurer or reinsurer will exclude it on the renewal policy. Once excluded in the renewal policy policy and the circumstance was not lodged in current policy, the insured may lose coverage related to the circumstance in both the existing and renewal policy.
How does a Circumstance differ from a Claim?
A Claim means:
- any written demand for monetary damages or non-pecuniary relief,
- any civil proceeding,
- any arbitration, mediation or alternative dispute resolution proceeding,
- a criminal proceeding,
- any formal administrative or formal regulatory proceeding commenced by the filing of a notice of charges, formal investigative order or similar document, or
- extradition proceeding against director, for a Wrongful Act, including any appeal therefrom.
What must a notice of Claim include?
A notice of claim must include the following information:
- Factual description of Claim with chronology of events
- Details of the Insured
- Details of the alleged Wrongful Act
- Copies of documentation relating to the Claim like the demand letter, exchange of communication with the plaintiff, summons, pleadings filed by both the plaintiff and insured
- Credentials or CV of the appointed defense counsel
- Details retainer agreement, particularly the defense counsel's hourly rates
- Copy of any legal opinion or assessment of the case of the defense counsel.
What is the effect of filing a Circumstance?
By filing a notice of circumstances, the D&O policy that will respond is the policy in effect when the notice of circumstance was filed and not the renewal or existing D&O policy when the notice of claim was subsequently filed. In effect, the renewal or existing policy will be reserved for new D&O claims that may arise in the future.
What does a D&O policy pay?
They are as follows:
- Cost of damages, judgments, and settlements
- Reasonable legal costs and expenses incurred in defending the suit.
What are the pre-requisites for the settlement of a D&O Claim?
They are as follows:
- The wrongful act was committed on or after the retroactive date.
- The claim against the insured must be made during policy period.
- The claim against the insurer must be filed within the policy period or extended reporting period.
- For Defense Cost, the prior written consent of the insurer must be obtained prior the engagement of a legal counsel.
- Proof of actual legal expenses must be submitted to and reviewed by the insurer.
- In case of settlement, insured agrees not to settle, or convey any offer of settlement to any claimant with regard to, any Claim, incur any defense costs or legal representation expenses or otherwise assume any contractual obligation or admit any liability with respect to any claim without our prior written consent.
What constitutes reasonable Defense Cost?
Defense Cost means that part of loss consisting of reasonable costs, charges, fees (including but not limited to legal counsels’ fees and experts’ fees) and expenses (other than regular or overtime wages, salaries or fees of the directors, officers or employees of the Insured Organization or office overheads, travel costs unrelated to any claim or other administration costs) incurred in defending, investigating, settling or appealing any Claim and the premium paid for appeal, attachment, bail or similar bonds.
Defense Cost shall also include reasonable costs, charges or fees resulting from an Insured lawfully opposing, challenging, resisting or defending against any request for or any effort to obtain the extradition of such Insured or appealing any order or other grant of extradition of such Insured.
Despite the presence of a D&O policy, the insured is expected to act as a prudent un-insured. As such, the insured should ensure that the legal expenses should not be exorbitant or excessive.
Defense counsel fees and expenses should accurately reflect the cost of the work necessary to defend or to resolve the claim. Consequently, acceptance fee is not covered if it is not based on actual services rendered. Acceptance fees should be treated like mobilization fees or downpayment in a construction project. It must be liquidated and contractor must show it is being spent for the project. In the case of the legal counsel, they must show the amount of time spent in drafting the pleading and preparing the legal opinion on the merits of the suit filed against the insured, at the very least.
In addition, the following shall not be reimbursed by us:
- Postage
- Telephone and mobile charges
- Facsimile charges
- Courier Services
- Overtime expenses for clerical and administrative works
- Stationery charges
All of the above are considered part of the firm’s overhead expenses.
In case of a claim, it is advised that prior consultation with a legal counsel or a professional insurance intermediary is obtained in order to protect an insured's rights under the policy.
What are the major D&O Exclusions?
- Wrongful act is outside the retroactive date.
- Lawsuit is filed prior to the Pending and Prior Litigation Date
- Fraud and intentional acts
- Suits instituted by the major shareholders
- Suits filed in North America
Cite some laws wherein a director or officers can be held personally liability for his acts.
Under BP 22 or Bouncing Checks Law, if the company is found to have violated the said law, the signatories to the check can be held liable for the payment of the amount of the check that bounced.
Under the Corporation Code, obligations incurred by directors and officers, acting as such corporate agents are not theirs, but the direct accountabilities of the corporation they represent. However, they may be held civilly liable in the following instances:
- Willfully voting for patently unlawful acts of the corporation
- Gross negligence or bad faith in directing the affairs of the corporation,
- Engaging in an activity which is considered in conflict with interest of the corporation,
- Issuance of watered stocks.
Under the Labor Code, violator of its provision declared to be unlawful or penal in nature shall be punished with a fine of not less than Php1,000 nor more than Php10,000 or imprisonment of not less than 3 months nor more than 3 years or both, at the discretion of the court.
The Labor Code further provides if the offense is committed by a corporation, the penalty shall be imposed upon the guilty officers of such corporation.
The Supreme Court has held in a number of cases that corporate directors and officers shall be solidarily liable with the corporation for the termination of employment of employees done with malice or in bad faith.
Under the General Banking Law, in the event that the acts of directors and/or officers of the bank constitute “conducting business in an unsafe or unsound manner”, they can be held civilly liable.
Under the Securities Regulation Code, a person found in violation thereof may be subject to the following sanctions:
- Payment of fine no less than Php10,000 nor more than Php1,000,000 plus not more than Php2,000 for each day of continuing violation
- Disqualification from being an officer, member of the Board of Director, or persons performing similar functions.
Can the director claim for reimbursement the cost and expenses he incurred relative to a suit he instituted?
No. D&O will only respond if the cost and expenses were incurred in defense of his self and not when he is the one who institutes the suit.
Will a D&O policy respond if the claim is arising from a criminal act?
Yes, but the policy benefits shall be limited to legal expenses only until there is a guilty verdict. The rationale behind this is that a director, like any other accused, is entitled to presumption of innocence.
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THE INFORMATION CONTAINED HEREIN HAS BEEN COMPILED FROM SOURCES BELIEVED TO BE RELIABLE. NO WARRANTY, GUARANTEE, OR REPRESENTATION, EITHER EXPRESSED OR IMPLIED, IS MADE AS TO THE CORRECTNESS OR SUFFICIENCY OF ANY REPRESENTATION CONTAINED HEREIN.