DIRECTORS & OFFICERS LIABILITY

POLICY
A Presentation by:

JK Risk Managers and Insurance Brokers Ltd
(A JK Group Company)


The JK Group
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15
90
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234
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50
100
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300
2004 2005 2006 2007 2008
A
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M
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Year
External Premiun Serviced Yearly
Figures in Rs. Mn
Service Delivery
To Insurers

Providing relevant and concise data in form of Broking slips

Act as marketing channel without bias

Coordination with TPAs

Claim expedition

To Clients

Web based applications

Value added services

Knowledge management

Software ITeS Infrastructure
Manufacturing
Govt./PSU/
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Specialization
Expertise covering all sectors
Introduction to D&0 liability
Although a company has a separate legal entity it is obviously incapable of
acting on its own and can only operate through its Directors and Officers. In
addition to the statutory duties a Director & Officer must act in good faith in his
dealings with and on behalf of the company and exercise the powers and fulfill
the duties of his office honestly. Thus the responsibilities of a Director become
increasingly onerous and complex.

It is important for companys executives to be sensitized to the fact that virtually
everything that they do creates the potential for second guessing and perhaps
claims by persons adversely affected by their actions and decisions.

Executive Liability is a perennial threat for corporations, large and small.

A Company Director or Officer is thus exposed by law to a formidable array of
liabilities and penalties both under the Companies act as well various other laws
aimed to protect the interests of the Company as well its employees.

450 laws out of the innumerable Indian Laws, directly hold a Director or Officer
in charge liable under various sections.


Cont
The Securities and Exchange Board of India (SEBI) has made several
recommendations regarding the minimum number of independent directors on the
Boards of listed companies, and the role that they should play. According to the code
now mandated through listing agreements-at least a third of the board must consist
of independent directors if the Chairman is a non-executive director, and half
otherwise.

SEBI board on 14th May 2001 paved the way for the creation of a code of conduct to
prevent insiders trading as also a code for corporate disclosure practices for listed
companies. Thus for the first time placing responsibility on India Inc to tackle the
menace of insider trading.

Even the Report on Investor Protection, calls for a clear shift in SEBIs role as a
regulator. They have proposed SEBI to be an on-and-off-the-field regulator on the
lines of the Securities and Exchange Commission (SEC) of the US, which incidentally
as a condition requires all the companies listing on the US Stock Exchanges to
maintain a D&O Liability Insurance.

Corporate Governance often requires the executives to delicately balance the
competing interest of various company constituents like Shareholders, employees,
customers, lenders, regulators etc.


Cont
A Director or Officer cannot be defended by the Company when legal activities are
initiated against him for any reason although he may have discharged his duties honestly
or may have been ultimately acquitted by the Court from the charges. As such, it becomes
very difficult for a Director to ensure that any negligent act by his subordinates, to whom
the ultimate responsibility for implementation of the decision is entrusted, perform their
duties honestly and in good faith.

The recent amendment to Clause 49 of the listing Agreement by SEBI ( on lines of the
Sarbanes Oxley Act of USA) places the Directors and Officers under more strenuous and
stringent scanner .

Thus we have seen that the responsibilities of a Director / Officer become increasingly
onerous and complex.

It is in light of this enhanced exposure faced by the companies and its Directors, that all
companies should have a contingency plan in place in case the nightmare scenario occurs.
This begs the questions What can a Company/ Director/ Officer do?

The answer is purchasing a Directors and Officers Liability Insurance Policy (D&O).
1933/34 Securities Acts
D&O Liability for misrepresentations, omissions in public
offerings, statements

1995 PSLRA
Intended to prevent abuses of securities class action lawsuits.
Heightened Pleading Standard

2002 Sarbanes-Oxley Act
Blackout trading barred
CEO and CFO certifications
Faster insider trading disclosure
Increased Audit Committee duties and SEC review
More criminal penalties and fines
Historical Legislation Impacting D&O Suits in USA
Liabilities - How It Arises

Various Laws & Acts Special focus on Companies (Amendment ) Act
2000, Environment Laws and Negotiable Instruments Act 1881, Tax
Laws
Duty of skill and Care
Fiduciary Duty
Statutory Duty
Increasing Recourse to global resources of financing and consequent
compliance requirements.
Stricter implementation of the capital market regulations by SEBI.
Consumer movements, class action and juridical activism.
Duty to Shareholders
The Main Exposures

Publicly Quoted Companies
Subsidiaries with Outside Shareholders
Joint Ventures
Raising Additional Capital
Mergers & Acquisitions
Major Restructuring
International Markets
Private & Public Offerings
Independent Directors on Board
Opening branches/subsidiaries overseas, particularly in the
USA
Who Can Bring an Action?

Government or Regulatory Bodies
Shareholders
Employees
Directors
The Official Receiver / Liquidator
Customers
Competitors
The Public
The Company
Creditors

The Potential Plaintiffs are:-
Can the Company Protect its Directors?
Whilst a company may indemnify its Directors for actions brought
against them, the scope of protection is limited and may well be
removed if:-

i) the company becomes insolvent
ii) the company has insufficient funds
iii) the company is the claimant
iv) the protection is withdrawn
v) they are no longer Directors of the company.

Most importantly indemnification by the Company is only permissible
when a claim is successfully defended.



Who is protected by the policy?
A Policy is normally arranged in the name of the Parent/Holding
company and provides protection to the Directors and Officers of that
Company and also to:-

1) The Directors and Officers of all subsidiary companies.

2) The directors and Officers of all Subsidiary companies acquired or
created during the period of the policy.

This policy may also be extended to provide what is termed as
Outside Board protection.



What Protection is Provided?

The policy protects the Directors and Officers against:-

1. It covers the directors and officers who commit a Wrongful Act in
their capacity as directors and officers of the company.
2. Legal costs in defending allegations or suits brought
against them alleging wrongful act.
3. Any awards granted to the claimants against the Directors &
Officers, including out of court settlements.

What is a Wrongful Act?

Wrongful Act is defined as :
Any error
Misstatement
Misleading statement
Providing relevant and concise data in form of Broking slips
Act, omission, neglect
Breach of duty, breach of trust or breach of warranty of authority
Employment related Disputes - means any claim to a past present or
prospective employee of the company and arising out of any actual or
alleged unfair or wrongful dismissal, discharge or termination, either
actual or constructive, employment-related misrepresentation, wrongful
failure to employ or promote, wrongful deprivation of career
opportunities, wrongful discipline; failure to grant tenure or negligent
employee evaluation; or sexual or workplace or racial or disability
harassment of any kind or unlawful discrimination, whether direct,
indirect, intentional or unintentional, or failure to provide adequate
employee policies and procedures, violation of any state law concerning
discrimination

Type of Allegations

Shareholders
- Inadequate or inaccurate disclosures
- Financial Performance and Bankruptcy
- Financial Reporting
- Gross Mismanagement
- Conflict of Interest
- Dishonesty or Fraud
- Investment or Loan Decision

Employees
- Breach of Employment Contract
- Employment Practices Liability - discrimination, sexual
harassment, unfair dismissal, invasion of privacy, failure
to provide a proper or safe working environment
Type of Allegations
Customers and Clients
- Lender Liability
- Deceptive Trade Practices
- Product or Service related claims

Competitors/ Clients
- Antitrust
- Copyright and Patent Infringement
- Business Interference
- Product and company defamation
- Deceptive Trade Practices

Government and Regulators
- Dishonesty and Fraud
- Securities Violation


Principal Policy Features
Scope of Cover

Cover 1 - Directors and Officers

To pay on behalf of the DIRECTORS AND OFFICERS all LOSS arising
out of a CLAIM for a WRONGFUL ACT for which coverage applies and
for which the DIRECTORS AND OFFICERS are not entitled to
indemnification pursuant to 2 below.

Cover 2 - Company Reimbursement

To pay on behalf of the COMPANY all LOSS arising out of a CLAIM for a
WRONGFUL ACT for which coverage applies and for which the
COMPANY is permitted or required by law common or statutory to
grant indemnification to the DIRECTORS AND OFFICERS.

Principal Policy 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
Defense costs Legal Costs means legal and professional fees and expenses
reasonably incurred in the defense of actions, suits or proceedings and
appeals there from 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.

Principal Policy Features
Scope of Cover (Contd.)

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
Defence costs cover if a director/officer is legally compelled to appear at
an official investigation
Severability as to all policy exclusions and the application form
No restriction on prior acts/retroactive date.
Broad definition of Claim Includes Criminal proceedings, formal
administrative and regulatory proceedings
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

Principal Policy Features
Few Extensions

Outside Directorship
Crisis Communication
Insured Vs Insured
Pecuniary Penalties
Court Attendance Costs
EPL Entity Cover
Securities Entity Cover
Predetermined Allocation of Legal Costs
Retrodate unlimited
Discovery Period

The Main Exclusions
Bodily Injury, Sickness, Disease, Death, or Damage / Destruction of Property.
Seepage & Pollution or Contamination.
Liability of a Director or Officer to restore or account for Remuneration paid to him for
which he is not legally entitled.
War and Civil War Exclusion ; Radioactive Contamination Exclusion
Terrorism Exclusion
USA / Canada Specific Exclusions
Prior and Pending Litigation Exclusion at Inception
Major Shareholder Suits Exclusion at 15-20%
Absolute BI / PD and Professional Indemnity
Future Securities Offering Exclusion
Criminal Fines and Penalties.
Insured Vs Insured Claims
punitive or exemplary damages
Claims on Directors / Officers acting in a capacity as trustee or fiduciary under law
(statutory or non-statutory including common) or administrator of any pension, profit
sharing or employee benefits programme
Exclusion due to underwriting considerations - Insurers may in addition to the standard
exclusions, endorse the Policy with additional exclusion because of the nature of the case.
For example, the company may be facing litigation; therefore the Policy will exclude any
claim or development arising from the claim. Family Holding / Parent Co. ex Is an example
of this




Suggested Limits

The common factors taken into consideration for fixation of limits are :

The amount of coverage carried is very closely aligned with Asset size.

However, it is commonly held that the more relevant factor in determining the necessary limit
of insurance purchased is the Market Capitalization of the Company. It can only take a small
drop in share price for shareholders to bring a suit so we would recommend that a director
considers this when choosing how much insurance to buy. A limit of at least 30-35% of the
anticipated drop in share price ( at least 50%) should be safely taken for D&O.

Another important factor to be considered is that the limits opted for are inclusive of the
Defense / legal costs. Taking into consideration the average time for settlement of a claim in
any country multiplied by the likely legal costs should safely be incorporated in the limits.

The other factors to be considered for limit fixation are overseas subsidiaries, US
exposure, JVs, Foreign / Independent Directors on Board , number of companies to be
covered etc.
Suggested Limits

Another consideration for the Assessment of Risk and loss arising out of a legal suit is
Balancing Costs against Risk.

Coverage Limits by Asset Size:
Average
Under $100 million $ 5.8M
$100-$400 million $ 14.4M
$400 million-$1 billion $ 27.1M
$1 - $2 billion $ 46.0M
$2 - $5 billion $ 50.9M
Over $5 billion $100.3M
All Assets Sizes $ 27.6M

Total Limits by Ownership:
Average
Fewer than 500 shareholders $ 8.03M
500 or more shareholders(public) $39.51M



Distinguishing Advantages

Have tailor made and Serviced this policy for a varied clientele.
Have worked for PSU companies as Consultants for their Policy
Procurement Process and servicing.
Competitive Premiums
Wider Policy Wordings with no ambiguity on the
Interpretation
The premium is not assessed on the basis of the number of
Directors / officers to be covered which is a far more costlier
option.
Bankruptcy or insolvency does not cancel the policy.
90 days automatic cover for outside position /directorship
taken by a director.
Claims Handling Ability in view of the in-depth experience on
this policy.
Claim Case Studies

Regulatory Claims
The Securities and Exchange Board of India (SEBI) has fined Reliance
Industries (RIL) a penalty of Rs. 4.75 lakh in a case related to violation of
Sebis takeover regulations with respect to RILs holding in cement and
engineering major L&T. Sebi sources confirmed the move and said its
investigation pertaining to violation of takeover regulations by RIL is now
over.
Top Officials of Stock Holding Corporation have been named in a Criminal
lawsuit relating to dishonoring of cheques issued by SHCIL. The client is
looking to have their Defence costs paid under their D&O policy

Shareholders Claims
A public interest litigation has been filed by a JPIL shareholder alleging
violation of takeover code by the company. The shareholder has alleged
that during 1999-2000, the promoters of JPIL, Jaiprakash Gaur ' and his
associates, had acquired 1,46,40,000 equity shares, which is around 10 per
cent of JPIL shares in 12 months without making a public offer. This is in
violation of the Sebi takeover code which allows creeping acquisition only
up to 5 per cent during any 12 months.

Claim Case Studies
Miscellaneous Claims
ICICI Bank has lodged a claim under their D&O policy for Rs. 25 Crores as an
outcome of an ongoing legal battle initiated by Commerce bank. The case is
related to funding of the Arvind Mills by ICICI Bank . Commece ban which
was also part of the consortium had objections to this funding. The claim
filed under D&O policy for recovery of legal expenses.

Director Vs Director Claims
The Tatas have filed a police complaint recently against six top executives
including Dilip Pendse, the former managing Director of Tata Finance Ltd.
(TFL), who were sacked last month following the discovery of unauthorized
transactions leading to substantial losses. The client has charged the
accused, Dilip Pendse and four others, of criminal conspiracy, falsification of
accounts, forgery and criminal breach of trust causing substantial wrongful
loss to the company (TFL) and its investors, specially of the 9 per cent CCP.
Claim case studies
Merger & Acquisition Claims
A shareholder class-action suit was filed against a parent company and its
directors and officers alleging the defendants were attempting to acquire
100% ownership of a partially owned subsidiary for grossly inadequate
consideration. The subsidiary was 61% owned by the parent company,
and the remainder was publicly owned. The parent company was
attempting to purchase the remaining 39% interest from the public,
thereby turning the entity into a wholly owned subsidiary. The case was
settled out of court with the defendants agreeing to pay $1.15 million to
plaintiffs to cover their attorney's fees in the litigation. The defendants
incurred defense expenses of approximately $1.2 million.

Employment Practices Claims
In 1994, Directors of an American Corporation was sued by 6 African-
American employees for alleged racial discrimination in the Corporations
hiring and promotion practices. The case settled in 1996 for $175 million.
Employment Practices Claims
An ex-employee of Infosys in US filed a Sexual Harassment case against the
Company and its former Director . The case was settled out of Court for
US$3 MN. D&O underwriters paid for the Directors Damages (US$1.5 MN )
and the defence costs (US$900,000). (Detailed write up in Slide no. 32)

Claim case studies
Infosys case:
Mr. Narayana Murthy Chairman and chief mentor of Infosys of
Infosys Technologies Ltd (NASDAQ:INFY) said:
Infosys has learned that the sexual harassment lawsuit filed by Ms.
Jennifer Griffith, a former employee against the company and Mr.
Phaneesh Murthy, a former director has been settled by Mr. Phaneesh
Murthy and Ms. Griffith shortly before October 29, 2004 the trial date
set for the lawsuits trial. Infosys has now learned that the settlement
agreement was recently signed by the parties to the settlement
agreement- Mr. Phaneesh Murthy and Ms. Griffith.
Infosys did not contribute any money to the settlement and was not a
signatory to the settlement agreement. However, Infosys has learned
from its insurers counsel that the settlement releases Infosys from all
claims and liabilities alleged in the lawsuit. Infosys learnt from its
insurers council that the insurers contributed US$400,000 towards
the settlement and this represents 50% of the total settlement
payment. The remaining 50% of the contribution was paid by Mr.
Phaneesh Murthy since Infosys refused to make any contribution to
the settlement.
Claim case studies
Outside Board Directorship Claims
A Director of a Company in Hong Kong was asked by his Company to sit on
the Board of another company in which it had a financial interest. The Board
of this other Company was subsequently accused by the regulatory authorities
of having been in breach of local regulations. Although it was able to
successfully defend these allegations, the legal defense costs for all the Board
Members was more than US$400,000 per Director. The breaches which were
alleged to have taken place were unknown to the one Director who was
assigned to the Board of that Company but this made no difference to his need
to defend himself against the allegations for which he was held personally
liable.

Shareholder Claim on an Indian Company related to ADR listing
An Indian Portal company listed on the US stock Exchange and its Directors
and officers have been recently faced with a class action suit from its
Shareholders for not disclosing material information in their prospectus, mis-
statement and omissions.
Claim case studies
Ex-Directors Claims on Subhiksha Case
PremjiInvest, the $1 billion private equity fund owned by Azim Premji, the
billionaire chairman of Wipro Ltd, is saying it was taken for a ride on Subhiksha,
the now-shuttered retailer in which it had invested Rs 230 crore in early 2008.
Investment banking sources said the private equity firm was understood to have
said it was misled on the true financial position of Subhiksha, which has prompted
it to send notices to the other directors on Subhikshas board, including those from
ICICI Venture, which sold a part of its stake to Zash Investment, an investment
vehicle of PremjiInvest. PremjiInvest officials confirmed the communication but
declined to share the details.

Sexual Harassment case
Coca-Cola India has paid beauty queen Sushmita Sen Rs 1.45 crore to buy her
silence over an alleged sexual harassment case against its marketing head Sripad
Nadkarni. Sen made the allegation soon after Coca-Cola terminated its celebrity
engagement contract with her on February 23. She alleged this was being done
because she had rejected the sexual overtures of a senior Coke official. Sens
lawyers also claimed sum of Rs 1.45 crore by way of compensation for sexual
harassment should be paid by way of charity to an orphanage of our clients choice.
The sum has since been paid by Coke. But according to the copy of the cheque of
ABN Amro Bank (No 932968, dated September 19, 03), a payment of Rs 1.45 crore
has been made to Sen, not to any charity
Claim case studies
Satyam Fiasco:
This is one insurance that has failed to bring relief to Satyam as the
companys claims towards the legal costs have been rejected by Tata
groups insurance venture Tata AIG. Tata AIG has, in its preliminary
view, disputed the claim sent by Satyam under its Directors & Officers
Liability Policy (D&O Policy), subject to the company providing
additional documentation and information. The primary policy was
issued by TATA AIG, along with The New India Assurance and ICICI
Lombard, forming multiple layers of cover. Satyam sent claim
notifications regarding receipt of notices from several regulatory
authorities and the Class Actions. It had also enclosed copies of letters
from directors and officers on likelihood of potential claims. However,
TATA AIG has sought additional documentation and information.
Satyam expressed its disagreement with positions taken by TATA AIG,
but agreed to furnish additional details. Satyam had incurred
insurance cost of Rs three crore in October-December 2008 and Rs
one crore each in January and February.


Top Five Largest Securities Class Action
Settlements
Rankings Company Year Settlement
Value ($Mn)
1 Lerach Coughlin Stoia Geller
Rudman & Robbins
2006 $7,307
2 Bernstein Litowitz Berger &
Grossmann
2005 $3,745
3 Cendant Corp. 2000 $3,528
4 WorldCom,Inc. 2004 $2,629
5 Lucent Technologies ,Inc. 2003 $517
According to the PwC study, between 1996 and 2004 there were 153 securities class actions that
involved both SEC and DOJ investigations, of which 90 percent, involved accounting issues. CFOs
were named as defendants in 83 percent of all class actions filed in 2004
Security Class Action Settlements
*Source: Stanford law school research
Federal Court Securities class Action Settlements
Involving Corporate Governance Changes


_______ ______________ ______________ __________
Oct 07 American Italian pasta $25 million
Company
June-07 DHB Industries $35 million

Dec-06 United Health Group $895 million

Jan-04 HCA Inc. $50 million

Dec-02 Mattel Inc. $122 million
$33 million of stock

Approximate
Settlement
Date
Company
Description
Settlement
Amount
Corporate
Governance
Reforms
American Italian Pasta Company (Pink Sheets: AITP), announced that it has
entered into a Stipulation of Settlement (the "Stipulation") with lead plaintiff in the
pending federal securities class action lawsuit. The Company also addressed
current durum wheat market conditions and announced the additional retirement of
debt under its credit facility.

DHB Industries said it intends to settle numerous class action lawsuits and one
shareholder derivative suit for more than $35 million. The suits accuse DHB
directors and officers of pumping up DHB's stock price by misrepresenting its
products and then selling the shares at the inflated prices

UnitedHealth Group (NYSE: UNH) announced it has reached an agreement in
principle with lead plaintiff California Public Employees' Retirement System
(CalPERS) and plaintiff class representative Alaska Plumbing and Pipefitting
Industry Pension Trust, on behalf of themselves and members of the class, to settle
the federal securities class action lawsuit arising from the consolidated amended
complaint filed on December 8, 2006, in the U.S. District Court in Minnesota against
the Company and certain current and former officers and directors relating to its
historical stock options practices. Under the terms of the proposed settlement,
UnitedHealth Group will pay $895 million into a settlement fund for the benefit of
class members
Brief about the cases involving Federal Court Securities class
Action Settlements Involving Corporate Governance Changes
HCA Inc. (HCA) has tentatively agreed to settle several shareholder
class action lawsuits for $49.5 million, the company said Thursday in its
third-quarter report. In the filing with the Securities and Exchange
Commission, the managed care services provider also said it reached a
preliminary understanding with insurers that are expected to pay the
majority of the settlement. HCA would establish a settlement fund to
pay class members based on individual claims under the tentative
agreeement reached in the third quarter.

Mattel Inc. on Thursday closed the books on what has been called one
of the worst acquisitions in corporate history, announcing a $122-million
settlement with shareholders over its ill-fated purchase of Learning Co.
The El Segundo-based toy maker said it would take a $25.5-million
pretax charge in the fourth quarter to cover legal fees and an uninsured
portion of the settlement, with the balance to be paid by insurers.
Mattel's settlement ranks No. 12 on the list of largest monetary
agreements between a company and its shareholders, according to
Cornerstone Research, a litigation consulting company.

Cont
Facts And Figures
Claim Susceptibility and Frequency by Asset Size

Company Size Susceptibility Frequency
Under $100 Million 12% 17
$100 - $400 Million 24% 34
$400 Million - $1 Billion 31% 50
$1 - $2 Billion 37% 61
$2 - $5 Billion 37% 74
$5 - $10 Billion 44% 84
Over $10 Billion 63% 4.87

All Assets Sizes 31% 0.87
Facts And Figures
Claim Susceptibility and Frequency by Business Class
Susceptibility Frequency
Petroleum, Mining & Agricultural 32% 0.71
High Technology 27% 0.47
Durable Goods Manufacturing 26% 0.52
Nondurable Goods Manufacturing 28% 0.42
Transportation & Communications 34% 1.18
Utilities 46% 0.76
Merchandising 33% 0.61
Large Banking 42% 0.69
Non-Banking Financial Services 34% 0.95
Construction & Real Estate 28% 0.63
Personal & Business Services 24% 0.34
Middle Market Banking 19% 0.30

All Business Classes 31% 0.8

Private Securities Litigation
Historical Claim Frequency by Sector

Facts And Figures
Number of Claims by Source and Allegation Worldwide
% of All
Claims
A. Past, current or prospective employees
or unions 49
B. Competitors, suppliers and other contractors 8
C. Customers, clients, ratepayers, students
and consumer groups 14
D. Government and regulatory agencies 2
E. Other third-party claimants 4
F. Shareholders and other investors, including
partners and members, prior owners 23
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or responsibility for the accuracy, completeness, or usefulness of any information, product or process
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