Personal risks facing board members in Latin America



FW moderates a discussion looking at personal risks facing board members in Latin America between Pascal Alvarez at Chartis, Alex Guillamont at Kennedys, and Alejandro Guerrero at Marsh S.A.

FW: To what extent have you seen an increase in the personal liability risk facing directors and officers (D&Os) in Latin America?

Alvarez: Despite the global economic downturn, most Latin American economies are still growing and have made the region a very attractive destination for investment and expansion. As a result, international capital is flowing into Latin America and with it the habits of foreign investors which are highly demanding and potentially contentious. Nowadays, new legislations around the world, the increased role and activism of regulators in many countries, coupled with increased international cooperation, means greater scrutiny than few years ago, all this within an expanding global environment in Latin America that is focused increasingly on corporate governance.

Guillamont: In terms of personal liability risks of directors it may be misleading to think of Latin America as an entirely homogenous region. Latin America is an amalgam of countries at different stages of development and this in turn impacts the potential sources of liability that directors and officers can face. In contrast with Asia where securities class actions are not uncommon, only the ‘big six’ countries in the LatAm region – Argentina, Brazil, Chile, Colombia, Mexico and Peru – have recognised some sort of class action system, but under none of these can a US type securities class action be brought outright. In fact only a few LatAm stock exchanges are a common point of reference in comparison to the Asian markets.

Guerrero: There are clear indicators that D&Os are facing more personal liability cases. We carry registers of cases along with several insurers and the number of cases is growing. We do not consider that exposures have necessarily increased; instead it is the awareness of claimants that is causing the increase. More often than before we find that cases that normally would have been addressed solely to the companies are now including the D&Os as well, as a strategy to generate more attention and obtain higher or faster settlements. There are, however, some new trends that increase exposures. For example, as more countries and companies in Latin America adopt and communicate concepts of compliance, transparency and corporate responsibility, they are also assuming a commitment towards such concepts that can broaden the scope of their exposures and the awareness of the general public. These are positive trends for the health of business transactions in general, but company leaders must also understand that such concepts may create exposures when they are embraced and publicised.

FW: What types of claims are being brought against D&Os? 

Guillamont: At a corporate level we have seen an increase in the number of claims notifications under D&O policies that in legal terms would really fall under a fidelity policy or a PI policy. While this may be the result of a more litigious – or rather, more litigation-conscious – environment in LatAm, it may also be a result of some D&O policies in the market offering additional first party coverage to the company. Legal actions against directors brought by the company are not very common in the region due in part to the thresholds of voting rights required to issue the same, but every now and then there are family feuds that do trigger derivative/minority shareholder claims. These can also be brought by the company or a new board of directors following an M&A transaction.

Guerrero: In general the trends have not changed. We still see employee-related claims topping the list of claims involving D&Os, with consumers claims close behind. There have been some claims related to allegations of lack of compliance with new administrative rules, such as money laundering procedures and other types of financial transactions under enhanced scrutiny by government authorities. 

Alvarez: Historically, many of the D&O claims against Latin American companies used to be in the form of US class action securities claims – for those companies listed on a US stock exchange – or in relation to a dispute between shareholders. As for investor relations, disclosure and accurate forecasting, along with reporting standards, have been tightened over the years and regulators are much more active. As a result D&Os are today more likely to be involved in an investigation, the outcome of which can be fines or penalties. Nowadays, the matters giving rise to litigation against D&Os are much more diverse and, while a large number of them are against D&Os of the top parent companies, we have observed more litigation against D&Os of subsidiaries, within or outside their home country, and even if wholly owned.

FW: Have there been any recent legal and regulatory changes in Latin America which affects the personal risks of D&Os? 

Guerrero: The main changes in recent years have to do with the administrative rules related to financial transaction procedures that specifically address the responsibility of D&Os for corporate conduct. Other regulations have not changed in particular, however consumer laws and regulations are putting more emphasis on actions that resemble class-action suits related to consumer rights.

Alvarez: In general, several countries need to enhance their legislation to bring them up to the new standards of corporate governance and D&O liability. At the same time, many others are on level footing with advanced countries around the globe. Mexico recently approved a law that will enter into force on March 2012 and enable class action claims to be brought in relation to consumer products, financial services, environmental matters, pollution or breach of antitrust regulations. Also, Brazil has recently started insider trading investigations related to earnings releases, and CVM, the Brazilian securities regulator, is developing a new system to monitor markets and detect trading patterns on the days prior to earnings releases. The use of non-public information to trade securities is a crime in Brazil and exposes its authors to severe penalties.

Guillamont: One striking aspect of the risks assumed by D&Os in Latin America is that, generally speaking, the board is jointly liable together with the director at fault. This feature of company law in the region has not changed since the relevant statutes were first enacted at the beginning of the 20th century although the judicial tendency in civil law countries has been to find liability for breaches of the duty of care even in cases of ordinary negligence, where the line between the business decisions or risks assumed by the company and the decisions or negligence of the directors is easily blurred. While in common law jurisdictions courts have been very reluctant to establish a duty of care between D&Os and individual shareholders or the company’s customers, in principle there is no legal impediment to establish such duty in LatAm countries, there being only a general duty of care in tort. As such it remains to be seen if NGOs or other stakeholders will use the still evolving LatAm class action regimes as a platform for bringing civil claims against D&Os for alleged financial or moral damages.

FW: What kinds of prosecutions, settlements and penalties have you seen imposed upon D&Os in Latin America? Are there any particular cases worth highlighting? 

Alvarez: Despite the fact that the litigation environment is not as active in Latin America as it is in more developed regions, we are starting to see an increase in litigation activity. Although not all claims brought against D&Os result in paid losses, the associated defence costs are steep as the process tends to extend over a long period of time and legal fees can represent a substantial portion of the final cost. In terms of exposures faced by D&Os, among the most common we currently see are bankruptcy and mismanagement, tax liability investigations, criminal investigations and prosecutions, securities class actions, and antitrust investigations.

Guillamont: In Brazil the securities regulator has settled investigations for approximately $100m and has imposed fines on companies of around $300m. In Mexico the securities regulator is currently probing several insider trading activities involving separate listed companies, has been bolstering its staff and investigating unusual share transactions that occur before an important company announcement. In August 2011 the Mexican securities regulator fined a trader of UBS approximately $120,000 for using inside information to make stock recommendations to his clients. Most claims made under D&O policies in Peru relate to criminal prosecutions against contractors of public procurement projects and criminal prosecutions by the securities regulator. Wide attention has been paid in Chile to a claim against the D&Os of retailer La Polar concerning an alleged manipulation of the account receivables to artificially increase the value of the company’s stock.

Guerrero: There have been very few cases that have actually required settlements and in most cases the principal factor of claims expenditures are defence costs. There have, however, been an increasing number of prosecutions against D&Os related to tax liability cases and money-laundering dispositions. A particular case in Argentina related to the prosecution of the money laundering officer of a bank for not notifying a specific case when an officer from another bank that co-participated in the same operation did notify the same operation. The defence counsel indicated that the principal that ruled such notifications was not the size of a specific transaction but, instead, the abnormality of a certain transaction according to normal and typical client behaviour. In this case Bank A was the principal bank with which the client in question regularly conducted sizeable operations and this was just another typical operation, but for Bank B, with whom the client operated much less, this was an atypical operation and therefore each bank, applying the same principal, viewed the same operation in two different ways and acted accordingly. The case is still being discussed pending final decision as to pretension of penalising the officer.

FW: What affect is the general increase in corporate regulation, and associated penalties, having on D&O liability insurance?

Guillamont: D&O insurance is a relatively recent introduction to the LatAm market and not as widely purchased as in more litigious jurisdictions elsewhere. The evolving regulatory changes in the region may not have an immediate impact on the general terms under which D&O cover is offered, nor on premium levels. Any modifications in this respect will most likely be considered on a case by case basis and the company’s and/or director’s claims history. Perhaps those companies with trade or investment links to the UK and the US will most likely be affected by D&O pricing in those jurisdictions, particularly companies whose shares are traded in those markets.

Guerrero: There has not been a direct effect on pricing and claims are still quite low for Latin America in general, however we are observing that insurers intend to be more conservative in the extension of policy wording, in particular when financial operations wordings are involved.

Alvarez: Demand for D&O policies has seen a considerable increase in the last couple of years, but penetration is still very low. We still see locally listed companies and even ADRs without the proper D&O risk management programs in place. Nonetheless, awareness is evolving, brought by the influence from more developed markets, the interest of more sophisticated investors, the use of outside directors and the increasing risk from a more active regulatory and legal environment. On the other hand, D&O policies continue to evolve to address contract certainty and expand the scope of coverage, making them more valuable and providing tangible benefits to policyholders. Still, many D&Os are unwilling to use a risk transfer approach to protect their own personal assets and the company’s based on the perceived low probability that a claim will impact their operation – a decision many D&Os have come to regret.

FW: What advice would you give to D&Os on selecting a policy that is appropriate for both the individual and the company? How important is it to properly assess the terms, coverage and pricing of available policies? 

Guerrero: Our main concern when advising our clients is that they ensure that policy wordings address local issues and specific matters related to the geographies and potential jurisdictions in which they operate. If clients use standard US wordings and are only exposed in Latin American geographies and jurisdictions, they are exposed to having a policy wording that does not contemplate local legal or judicial aspects. The proper assessment of terms and coverage is key to proper counselling for a client. Pricing will vary substantially if policies are not as broad, and unfortunately what may appear as a small difference in cover may have a great impact when claims arise.

Alvarez: First, it is important that D&Os, guided by their insurance broker, select an insurance company that is committed to the Latin America region, has the expertise and specialisation in this type of insurance, and has local and global experience in the underwriting of D&O risks as well as the expertise to handle claims. An insurance company with a large geographic footprint also benefits D&Os doing business in multiple international jurisdictions by being able to provide local policies issued in multiple countries. Policies have evolved a lot in recent years, as has competition between insurers, and now global insurers offer the same broad coverage to D&Os in Latin America than their peers can find in the most developed insurance markets.

Guillamont: Directors should have a clear understanding of the meaning of defined terms so that the purpose of conditions and exclusions can be put into context in their circumstances. As previously mentioned, we have seen situations where claims are made under D&O policies where the underlying issue is better suited for reporting under a fidelity or a PI wording. Directors must be aware that D&O policies are not necessarily a blanket bond. There will be situations where the company will be able to indemnify the director and situations in which the directors may find themselves facing an action alone, whether as a result of regulatory impediment or conflict of interest situations. Thus it is advisable for directors to be aware of the underlying company legislation that concerns them – this entirely depends on their specific needs and company characteristics.

FW: Looking ahead, do you expect to see more Latin American companies taking a proactive approach to risk management tailored specifically to protecting board members? 

Guillamont: This is already happening because of the corporate governance initiatives in the region coordinated by the OECD and World Bank in Latin America. Corporate governance institutes are also being established in each country. These initiatives apply to both listed and non listed companies and increasingly more LatAm companies advertise that they comply with some sort of voluntary code in terms of corporate governance. Latin America will continue to be a magnet of foreign investment in terms of infrastructure, energy, retail and commodities, so institutional investors will have a very important say in terms of corporate governance and risk management as they become active shareholders in these projects.

Alvarez: While the number of companies with D&O insurance in place is still relatively modest, there is definitely an increased awareness in the region about the risks that D&Os face and knowledge on the part of D&Os of the existence of an insurance solution to protect their assets. Sometimes, a market ‘shock’ is necessary for them to have their company buy such insurance protection: for instance, in Chile, the highly publicised financial scandal involving one of the country’s leading retailers is contributing to a significant increase in demand for D&O insurance as local businessmen become more aware of their personal liability and the importance of an insurance policy to protect their personal assets. As D&O claims become more publicised as regulators conduct more investigations, there is no doubt that the question of ‘how to mitigate their personal risks’ is on top of the agenda of many D&Os.

Guerrero: We already see a greater concern from board members and risk managers to ensure that their individual policies are reviewed and adjusted to their specific needs, and not just ‘accepting’ standard wordings. As a matter of fact we are asked to conduct permanent reviews of policies in conjunction with the client’s legal counsel to assure that policy wordings are adapted to the needs and jurisdictions where the client operates.


Pascal Alvarez is a vice president at Chartis, in charge of Financial Lines for the Latin America & Caribbean Region. Throughout his near 20 year career with Chartis, Mr Alvarez has held a number of managerial positions including Financial Institutions manager for France, Financial Lines Profit Center manager for Spain, and Regional Financial Institutions manager for the Continental Europe Region. Mr Alvarez can be contacted on +786 777 74 79 or by email:

Alex Guillamont is partner at Kennedys and the founding director of their Miami Latin America office. His expertise includes policy drafting, coverage and claims advice for insurers and reinsurers writing a wide variety of risks in Latin America and the Caribbean, including Financial Institutions.  He was previously based in Kennedys London and Madrid.  Mr Guillamont can be contacted on +1 (305) 371 1111 or by email:  

Alejandro M. Guerrero is managing director of Marsh and chief operating officer for Marsh Argentina. He is also regional Financial & Professional (Finpro) leader for Latin America & Caribbean and a member of Marsh's Finpro Advisory Board. Mr Guerrero studied Law at the University of Buenos Aires and has been in the insurance industry for over 26 years. His experience in the D&O, Professional Indemnity, and Financial lines of insurance have earned him strong recognition with insurers and clients throughout the region and world. He can be contacted at +54 11 4320 5928 or by email:

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Pascal Alvarez



Alex Guillamont



Alejandro Guerrero

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