Directors and Officers Liability Insurance


Directors and Officers Liability Insurance (D&O) is a liability insurance that covers “individual directors and officers (D&Os), for loss arising from claims against them for which they are not indemnified by the corporate entity” and covers, as well, “the corporate entity, for the amount it pays on behalf of the D&Os to indemnify them for loss they sustain.” The latter is known as the “company reimbursement clause.” It can also cover the company itself in what is known as the “corporate entity clause.” The necessity of a D&O insurance lies in the fact that directors and officers can be held personally liable for corporate acts. Being a liability insurance, it does not cover suits filed by the directors or officers.

The loss referred to are litigation expenses, specifically lawyer’s fees, bonds, cost of settlement, award of damages and other monetary obligations in relation thereto, in case they are sued. Loss usually excludes fines and penalties. There are insurance policies that exclude punitive damages, as when it is prohibited by law, on the ground of public policy. The reasoning is that punitive damages is intended to set an example or punish the wrongdoer, and permitting insurance against such punishment would render such punishment ineffective.In the Philippines, the Insurance Commission issued Legal Opinion LO-2017-05, July 12, 2017 stating: “Exemplary damages, regardless of the nature of the proceedings where the same is awarded, are not insurable under Philippine laws on the ground that the same is against public policy.” This opinion covers exemplary damages awarded even in non-criminal proceedings, which was the main query. The opinion cited Article 2229 of the Civil Code, which provides that exemplary or corrective damages are imposed by way of example or correction for the public good. The opinion was rendered upon query of FPG Insurance Co., Inc.

The body where the litigation or case is filed may be a regulatory, administrative, civil and criminal court. The suit may be brought by shareholders of the company, customers, vendors, competitors, suppliers, regulators, creditors, and others for alleged or actual wrongful acts in the course of their corporate duties.

D&Os only cover acts or omissions relating to official activities of the company. Excluded are deliberate criminal acts as well as fraudulent acts.

History of D&O

IT was in the 1930s when Lloyd’s of London introduced this insurance for corporate directors and officers. Its popularity did not pick up immediately. Even in the 1960s its sales were negligible. It was only in the 1970s when its necessity was being noticed. By the 1980s and the 1990s, D&O has become a standard feature when claims against directors and officers have increased. In the 1997 Wyatt Report, it was surveyed that 31 percent of all companies could expect to have at least one claim made against its directors or officers, and each company averaged 0.87 claims.

A recent proposal in the Philippines is to make D&O policies compulsory for listed companies, although it has been estimated that around 15 percent already provide D&O. In Hong Kong, D&O is compulsory for listed companies. In Singapore, it is not compulsory, but over 80 percent of listed companies provide D&O. In the US, over 95 percent of Fortune 500 companies have D&O insurance. 

GOCCs

For government-owned and controlled corporations, D&O policies are made available by the GSIS. The coverage is available for appointive directors, ex officio board members, alternates of ex officio board members, and executive officers. Authorization to provide D&O coverage is provided under Section 32 of the Code of Corporate Governance. As an alternative, a GOCC may provide for “self-insurance” by creating a Directors and Officers Liability Fund.

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  1. How about other government agencies (ex. DILG), not GOCCs, are they allowed to procure DOLI? can they procure DOLI?

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