What is a D&O insurance contract for?




The insurance contract for civil liability of directors and officers (D&Os), commonly known as D&O insurance, has recently caught the attention of the Brazilian business community. The compliance and corporate governance advantages, as well as the direct benefits to D&Os, have driven the growth of this type of insurance in Brazil.

Beyond these advantages, D&O insurance has become almost compulsory in the Brazilian market, due to the risk that D&Os could be considered liable just for participating in a company’s directorate, fiscal and administrative councils and audit committee.

Company administrator’s may face claims of liability, the origins of which are varied, such as consumer, labour, tax, competition, regulation, environmental, civil and corporate law, among others. A D&O who is aware of his or her responsibilities will not undertake the duties or acts of management without the protections offered by a D&O insurance policy.

Defining an act of management is a complex matter, however and it can hinder parties’ understanding of the risks covered by their insurance policies. To reach a correct definition, companies should establish what constitutes an ‘irregular management act’. In Brazil, according to article 158 of Federal Law no 6.404/1976, “the administrator is not personally liable for the obligations contracted in the company’s name as a result of a regular management act”. The law also states that an administrator “is liable, however, civilly, for the damages he causes, when proceeding: I – within his attributions or powers, with fault or malice; II – with violations to the law or to the company’s bylaws”.

‘Irregular management acts’ are those where the administrator is at fault or demonstrates wilful misconduct, in addition to violating the country’s law or bylaws.

Regarding the intersection between the coverage related to management acts and the coverage contained within D&O insurance, an important distinction is necessary. D&O coverage is available for negligent conduct, not for wilful misconduct. Article 5 of Circular SUSEP no. 553/2017 notes that “In the D&O insurance, the insurer guarantees to its assureds that, when liable for damages caused to third parties because of negligent illicit acts practiced in the exercise of the functions for which they have been named, elected and/or hired (…)”.

Denial of coverage for wilful misconduct is stated in article 3, item XVII: “the insurance cover does not apply to the cases in which the damages caused to a third-party elapse from a malicious illicit act, namely, those carried out by the assured with proven malice or gross negligence”.

Unlike other insurance contracts, where it is straightforward to examine the insured’s gross negligence and wilful misconduct, D&O insurance requires analysis of the administrator’s liability and, more precisely, examination of what constitutes the duties of diligence and loyalty, respectively, according to articles 153 and 155 of Law no. 6.404/1976.

For claims related to automative or fire insurance, for example, an insured’s wilful misconduct and gross negligence are often easier to verify. Effectively, driving distractedly and causing a road traffic incident, or failing to maintain a sprinkler system and causing a fire, cannot be compared to driving with the deliberate intention to maim or kill someone or to setting fire to a commercial establishment to receive an insurance payout.

Establishing the fault of an administrator requires a thorough examination of the administrator’s duty of care, which unfolds in the duties of qualification, information, vigilance and, as needed, investigation, beyond providing information to the market about relevant facts.

On the other hand, an administrator’s wilful misconduct comes from a different source: breaching the duty of loyalty. Taking advantage of an opportunity intended for the company, misusing the company’s privileged information, buying or selling stocks before relevant facts are disclosed to the market, or directing opportunities for personal gain, would not be covered under any D&O insurance policy.

Regarding liability of an administrator, problems often arise from difficulties in understanding the duties of care and loyalty. Analysing them jointly foregoes the methodological distinction referred to previously.

A negligent administrator could end up damaging him or herself, be it from a loss of bonuses, attracting criticism or even being dismissed; a disloyal administrator, however, can quickly profit from his or her conduct.

In practice, these two duties do not mix, and the practical consequence for D&O insurance is coverage for breaches of care and denial of coverage for breaches of loyalty. There is a lesson to be learnt here from the judgement of Special Appeal no 1.601.555/SP, rapporteur judge Ricardo Villas Bôas Cueva, in which, analysing a hypothesis in which the insured practiced insider trading, said: “the D&O civil liability insurance only covers (i) negligent acts of directors, administrators and counsellors; (ii) practiced in the exercise of their functions (management acts). In other words, fraudulent and dishonest acts for personal advantage and malicious practices damaging to the company and to the securities market, like insider trading, are not contained in the insurance’s coverage”.

In summary, D&O insurance covers violations relating to duty of care, but does not apply to breaches of duty of loyalty.


Ilan Goldberg is a partner at Chalfin, Goldberg, Vainboim & Fichtner Advogados Associados. He can be contacted on +55 21 3970 7200 or by email: ilan@cgvf.com.br.

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Ilan Goldberg

Chalfin, Goldberg, Vainboim & Fichtner Advogados Associados

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