Mumbai: Indian corporates may be far behind their US counterparts in buying directors and officers (D&O) liability cover from the general insurance agencies as a means of safeguarding themselves. But the trend is picking up. The buzzword in the insurance business today is D&O insurance, against the severity and size of litigation and settlement values.

Tata AIG General Insurance Company, the leading player in this segment, has already sold around 75 to 80 D&O policies. The company has earned a premium income of around Rs 200 crore during the last financial year as against Rs 85 crore in the financial year 2001-02, say senior company officials.

Tata AIG vice-president Uttara Vaid says directors and officers can be liable for their decisions that affect shareholder value. "Any company, listed or otherwise, from a closely held company to a joint venture company having operations in India or on a global scale is a potential client for us. Our strategy is to reach out to one and all and offer them the protection in the new business environment, which is highly influenced by western or corporate economics."

A New India Assurance company official says directors and senior officers of corporates ought to be taking the D&O liability cover, particularly because the stringent corporate governance measures expose them to several risks. "The insurance will help them at least cover their defence expenses."

"Non-life companies are slowly realising that D&O covers issued to software companies are a costly affair. With most of them catering to the US market where litigation costs are killing, companies such as Infosys has made claims for legal charges in the harassment case filed against its former executive, Phaneesh Murthy. D&O cover has assumed more importance after the Polaris Software episode," says an industry source.

The insurer will distinguish between civil and criminal liability, and will cover even the 'fines and penalties,' if it were not a criminal case. Tata AIG officials say the D&O policies are not yet popular in India (unlike in the US). In 2001-02, Tata AIG sold 52 D&O liability policies. "This year, the number of policies sold has exceeded 75, but still that is nothing in a country that has 9,000 listed companies and about 6,00,000 registered companies."

According to industry sources the insurance company will "walk out of the policy" only under two circumstances — if the director himself confesses to criminal intent, or if the courts find him criminally guilty. The premium and the extent of cover (sum assured) will be case-specific, but could range from $500 to $2,000 per person.

Following the US Securities and Exchange Commission's (SEC) initiative to introduce stricter rules to watch the accounting scandals, the D&O cover has attracted more attention.

Foreign equity issuers in the US market have become a major target of the SEC. India is among the top 12 countries against whom the SEC has taken action. With the SEC having tightened the noose around foreign issuers in the US, three large Indian corporates have already faced investigation by the US capital market watchdog.

US securities claims against foreign issuers rose from six in 1996 to 12 in 2000, 44 in 2001 and 18 in the first nine months of 2002. Forty of the foreign issuers' claims in 2001 were related to American depository receipts or direct listing.