The D&O insurance policy and its growth in Brazil
June 2017 | EXPERT BRIEFING | BOARDROOM INTELLIGENCE
Directors and officers (D&O) liability insurance is a product created to cover corporate and other organisational directors and officers against liability for non-intentional management acts committed in their insured capacity.
Created in the Lloyd’s market in the 1930s, this type of insurance only arrived in Brazil in the 1990s, during the public enterprise privatisation era. In that period, together with foreign capital, many foreign executives entered the country and demanded such coverage. Later, especially after 2003, it gained much more importance because of the enactment of the new Brazilian Civil Code, which clearly brought the concept of piercing the corporate veil and, consequently, increased the exposure risks of directors and officers.
More recently, it has become a trend topic, because Brazil has enacted the Anti-Corruption Act, giving rise to several investigations on the matter, such as those involved in Operation Car Wash (Lava Jato), as well as lawsuits, and, consequently, the triggering of several D&O policies.
Brazilian regulation of D&O policies
Although framed as civil liability insurance, since its arrival in Brazil the D&O insurance policy has been considered as an autonomous type of insurance, due to its principles and specificities. Thus, each insurance company has created its own product, following some parameters of the regulation applicable to general civil liability and especially foreign policy models.
The recent rise of triggered policies due to alleged corrupt practices has materially affected the underwriting of these policies. As a consequence, insurance companies have decided to proceed with some interesting changes in their standard policies. For example, they decided to expressly exclude defence cost coverage in claims related to Lava Jato. More recently, the Brazilian insurance regulator Superintendencia de Seguros Privados (SUSEP) has issued a controversial normative act regulating the minimum requirements for the underwriting of D&O policies. Because this new regulation has suffered much criticism, it was suspended on 24 February 2017 for a 90 day period.
D&O policies – main characteristics
Brazilian D&O policies can mainly provide three forms of coverage: (i) Coverage A – which covers the administrators’ losses arising from lawsuits where their wrongful acts, committed in their insured capacity, are being questioned; (ii) Coverage B – which reimburses a company in cases where it is required to advance the administrators’ indemnification payment; and (iii) Coverage C – which covers a company’s losses, in general, related to claims before the Brazilian Securities and Exchange Commission (CVM).
Coverage A is the most commonly triggered and includes both reasonable defence costs incurred by the administrator – judicial, administrative and sometimes even investigative – and indemnification to be paid to third parties in cases of a final unfavourable decision. A common criticism to this coverage is that Brazilian insurance policies usually establish that defence costs shall be advanced by the insurer and, depending on the contracted guarantee limit, they can consume the entire guaranteed limit amount before the insured party is even condemned to pay damages to third parties in the case of unfavourable decisions. Further, in practice, even if the court recognises a case of coverage exclusion and the insured is condemned to reimburse the advanced defence costs, it is very difficult for an insurance company to collect this reimbursement.
Although the D&O policy is usually an ‘all risk’ policy, in the scope of this form of coverage, the policyholder in Brazil can still agree on a number of other additional coverages that are normally excluded, such as the payment of a certain amount during the period in which the director or officer has his or her assets frozen in a judicial lawsuit or professional licence suspended; coverage for agreements settled in administrative proceedings and coverage in lawsuits filed by the policyholder against the insured party.
Among the main exclusions are: (i) claims attributable to dishonesty, fraud and criminal or malicious acts; (ii) lawsuits that are pending or are prior to the policy term; (iii) actions unrelated to the management activity; (iv) lawsuits involving criminal or tax liability; (v) complaints filed by other insured persons or by the policyholder; and (iv) matters related to Lava Jato. Note that the exclusions mentioned in items (iv) and (v), for example, can be contracted as additional coverage.
The controversial circular SUSEP and the proposed changes
Because of the constant growth of investigations and lawsuits involving directors and officers, the demand for D&O insurance policies in Brazil has seriously increased. As a consequence of this, SUSEP has recently issued a controversial normative act aiming to regulate the minimum requirements for the underwriting of D&O policies, which has been suspended since 24 February 2017.
Some of the main criticisms of SUSEP’s new regulation are related to the following provisions. First, lack of provision for coverage type C (entity coverage). The regulation does not mention the company in its definition of insured party, nor in the object of this type of insurance. Second, prohibiting D&Os from arranging a D&O insurance policy. When defining the object of this type of insurance policy, the new regulation does not permit a person other than the company to arrange the insurance policy. Therefore, apparently, the directors and officers cannot hire it in their own benefit. Third, defence costs as additional coverage. Instead of having the defense costs as basic coverage, the policyholder will have to pay additional premium to add this coverage to its policy. This provision also results in preventing a “closed supplementary pension entity” from arranging D&O policies. Fourth, adoption of arbitration as a mandatory dispute resolution method. This criticism might result from the new regulation’s poor language, since it does not make clear that what is mandatory is only the existence of a clause in the insurance policy allowing the parties to choose arbitration as a dispute resolution method. Fifth, term definitions, such as occurrence basis, claim made basis and maximum guaranteed limit amount, that are not in accordance with the D&O insurance policies’ term currently adopted in the international market. Sixth, exclusion of environmental risks related to D&O insurance policies. Finally, forbidding reference to any foreign legislation. Considering that D&O insurance policies usually have a worldwide scope, this provision could lead policyholders to buy insurance policies abroad.
Despite the criticism, the new regulation clarifies that the insurance company will cover administrative fines.
Topics to be aware when contracting and similarities to foreign D&O policies
This type of insurance policy requires the policyholder and insured party’s to consider some relevant issues. For example, they have to carefully fill-in proposal forms, since material omissions or inaccurate information provided by the contracting company may give rise to a denial of coverage in the future. In addition, they should carefully analyse the exclusions and extensions of coverage, because some proposed additional coverage may be extremely important, such as covering losses that result from freezing the administrators’ assets during a judicial proceeding.
Until very recently (more precisely until 2008), there was no case law and few domestic doctrines about D&O insurance. It was due to the recent growth of judicial disputes involving directors and officers, especially after the enactment of the Anti-Corruption Law, that this type of insurance has gained importance. Nowadays, this type of coverage is almost a prerequisite in order for D&Os to accept their engagement in a management position.
This recent rise of D&O insurance requests, the increase of triggered policies, as well as judicial disputes involving insured parties and insurance companies, are shedding a new light on the matter and, consequently, calling the Brazilian market’s attention to the necessity of better understanding and developing this type of product.
Although D&O insurance is not a solution to the entire management problem Brazil is facing, it can definitely ensure a more peaceful environment for D&Os that are serious professionals willing to take the necessary risks to benefit the companies they manage.
Fábio Figueira is a partner and Andrea Piccolo is a senior associate at Veirano Advogados. Mr Figueira can be contacted on +55 (21) 3824 4740 or by email: firstname.lastname@example.org. Ms Piccolo can be contacted on +55 (21) 3824 4745 or by email: email@example.com.
© Financier Worldwide
Fábio Figueira and Andrea Piccolo