MUMBAI: The sacking of Cyrus Mistry and its fallout might trigger a claim under the Directors & Officers (D&O) insurance cover purchased by Tata Sons.
A D&O policy covers the top management of an organisation from legal actions initiated by employees, shareholders or authorities against the decisions taken by the top brass in the course of their duties. Besides damages, the policy covers the cost of legal defence of directors, even in their individual capacity, where the company is unable to defend them. Insurance industry insiders are worried that trading of allegations might lay the ground for legal action by investors or directors, triggering a claim.
Like many companies, Tata Sons too has a D&O cover, which is understood to have been for $50 million three years ago. However, in 2014 Tata Sons is learnt to have sought an increase in the cover, which is provided by Tata AIG General Insurance and arranged by Howden Insurance Brokers. However, the insurers declined to comment.
Apart from providing insurance to the directors of Tata Sons, the policy also acts as a cover for group companies. In response to a TOI query, a Tata Sons spokesperson said that the company purchases different kinds of covers according to its requirements but did not elaborate.
Insurers say that the most potent development in the Tata battle is the letter from ousted chairman Cyrus Mistry where he raised the issue of impairments and made a statement that Tata Motors was taking loss-making decisions on emotional grounds. “The risks of investor actions are very high in the US where the company is listed,” said an insurance official. In case of proceedings in the US, the defence cost itself runs into millions of dollars and these have typically comprised a large chunk of D&O claims.
There are about three or four scenarios in which a claim might be raised under a D&O liability cover where there is a shake-up at the board level, said Amit Agarwal, practice head, Financial Lines Group at JLT. “If any action of the board results in a drop in share price and erosion of market cap, which leads to loss of shareholder value, then there is a possibility of a section of them bringing a class-action lawsuit against the company and against individual directors,” Agarwal said.
In this case, a section called the `Side C’ coverage will protect the company and its directors. Besides shareholder action, the cover could also be activated if an ousted board member brings about a retaliatory suit against other board members.
Another scenario is one where a director acts as a whistleblower and brings action against another for decisions taken when he was in office. “Such a scenario would be treated as an insured versus insured claim. A full-blown liability cover is usually not provided in these cases and insurers usually limit the policy to covering the cost of defence action,” said Agarwal.
If the company chooses not to indemnify the directors for claims against them, then personal liability coverage -available in the form of `Side A’, which protects the personal assets of the directors -gets triggered. “With recent events, there is a possibility of increase in demand of Side A cover as part of the D&O and also standalone Side A cover which are typically broader in coverage,” Agarwal further added.