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Taking counsel

  • 2004-12-22
  • By Anete Rubene, senior associate at Sorainen Law Offices in Riga
Board liability insurance in the Baltics

In the 1990's shareholders were also engaged in the management of their companies in the Baltic states. Today, due to an increase of foreign investments, the situation has changed. Shareholders employ professionals to manage their companies. This trend creates increasing interest in insurance of civil liability of board members (executive and nonexecutive boards). The benefit of this insurance is for both sides: shareholders insure themselves against potential loss as a result of wrong action taken by management, and the board insures itself against claims from shareholders or creditors. These policies are called D&O liability insurance policies.

Insured risks. Board liability insurance policy indemnifies the financial losses caused to shareholders, creditors and third parties as a result of wrong action taken by the board or its individual members. When assessing risk and fixing the premium, many circumstances are taken into account such as company owners, their reputation, operating history of the company itself, reputation of directors and so on.

Exceptions. Board liability insurance contracts are one of the most complicated in the insurance business. Usually an insurance policy does not cover the losses or damages caused by a director (board member) to the company if the director was aware of potential claims before the effective date of the policy. The insurance company's risk is that these claims are not properly disclosed by the directors. How does one resolve a claim arising from a decision made by previous directors?

Indemnification of losses. The amount of insurance indemnity is the sum to be paid by the board as compensation of losses arising from the wrongful actions or mistakes (e.g., tax risks) by the board. Most insurance policies will have large deductibles and high premiums.

Company creditors who cannot satisfy their claims from the company may lodge a claim in favor of the company against its management. This means that in a company insolvency a D&O policy is in most cases the creditors' only hope to receive compensation of losses caused by wrongful decision-making by the board.

Obviously, insurers prefer insuring clients with sound management and predictable shareholders. A good reputation lowers premiums.

Trends. It should be admitted that D&O insurance has not been popular until now, but lately interest has been increasing. In the Baltic states, the first customers are often companies with long-term business projects - i.e., branches and subsidiaries of overseas companies. Prior to issuing an insurance policy to subsidiaries of overseas companies in the Baltics, insurers carefully assess the operations and reputation of its parent company, which largely affects the price of a policy.