The Hindu Business Line : A code for safety

Company directors and chief information officers walk on the razor’s edge, as it were, accountable for any steps they take — and the risks and losses triggered by their decisions.

In such a context, how do companies hedge for some measure of safety?

They can turn to insurance to help them recoup any losses triggered by decisions taken by the top brass.

Software companies too face some major risks, such as:

Risk to the Assets of a company

Risk to its employees or associates

Business Liability

Insurance offers protection here. For instance, Asset insurance includes Standard Fire and Special Peril Policy, advertisements such as Neon sign glow, lift insurances, money insurance (for safe custody, transit), fidelity insurance (for specific number of employees), all-risk policy (laptops, projectors).

Associate or employee insurance covers mediclaim policies, Personal accident policy — coverage in case of death and in case of disability — and Group travel policy.

In this article, let us take a closer look at Business Liability insurance.

In this context, Attorneys should advise companies on all the insurance products available in the market to protect them against contractual indemnification claims.

Intellectual Property (IP) Rights and IP Products have become the core value to companies in the software industry. Lawsuits involving intellectual property can put businesses at risk of their very survival. Defence cost could mount to millions. Thus it becomes critical for the software industry to carefully craft its risk management strategy.

Policies on offer

Business risks are covered under Commercial general liability policy, Excess general liability, Fidelity Insurance, Errors and Omissions, Directors and Officers Liability.

Commercial General Liability Policy: Since the 1960s, the insurance industry has sold Comprehensive General Liability (later called Commercial General Liability) (‘CGL’) insurance. The CGL policy is a standard form of liability insurance policy promising broadest coverage available.

Information Technology companies sued in intellectual property disputes have typically looked to their CGL insurers for defence and indemnity. However, nowadays some insurers exclude Intellectual Property infringements from the insurance coverage. Hence, it has become all the more important that attorneys select the right insurance product and advise their clients about insurance coverage, and also disclose pending litigation to insurance companies.

In India, software companies usually go for this insurance, for risk cover in the $5-10 million range.

Bodily injury and property damage liability

Under this insurance cover, insurers will pay those sums that the insured becomes legally liable to pay as damages because of bodily injury or property damage. Insurers have the right and duty to defend the insured against any suit seeking these damages.

There are some exclusions to this cover, including Expected or intended injury, Contractual liability, Liquor liability, Worker’s compensation and similar laws, injury due to Pollution, Aircraft, Auto or Watercraft, Mobile equipment, etc. (This exclusion list here is not exhaustive.)

Fidelity guard policy

This policy covers employee dishonesty, loss of money, securities or other property resulting directly from one or more fraudulent dishonest acts, losses caused by unidentifiable employees, third party computer and funds transfer fraud, the theft of money, securities or other property by computer fraud, or the theft of any of the insured’s funds from their transfer account as communicated to such financial institutions.

Indian tech companies usually go for this policy with cover in the $5-8 million range.

Excess umbrella policy

This policy operates over and above the limits of Commercial General Liability Policy with the same terms and conditions.

Directors and officers liability insurance (d&o policy)

This policy operates under two sections: Section A: This section pays the loss of each insured for a wrongful act in the insured’s capacity as a director, officer or employee of the Information Technology company to the extent that the company has not indemnified the insured.

Section B: This section pays the loss of the company for a wrongful act in the insured’s capacity as a director, officer or employee of the company but only when and to the extent that the company has indemnified the insured for the loss.

Who is covered?

The cover applies to former, present and future members of the Board of Directors and the Management, comprising officers and employees in a managerial or supervisory capacity.

The policy normally covers the Parent company and all subsidiaries of the Parent company as mentioned in the last annual audited accounts submitted with the proposal form. Should it be required to cover the Directors of newly acquired companies (through mergers, acquisitions, take-overs) or shadow directors, the same should be noted in the Policy. The Policy is designed to operate on an unnamed basis covering all directors/officers and employees of the insured/Policyholder.

What are the types of wrongful acts that can be alleged against Directors?

The wrongful acts that can be alleged against directors are misuse of corporate funds, financial loss to corporations, auditing and accounting practices, breach of duty to minority shareholders, questionable payments, misleading representations, management integrity, collusion/conspiracy to defraud, companies act violations, customers suit, fiduciary responsibilities, stockholders suits, false statements to government agencies, irregularities in securities issues, failure to honour employment contracts, inadequate supervision, public activists groups, bankruptcy suits, granting stock options, actions by creditors, conflicts of interest, anti-trust violations, quality of management, questionable practices, civil rights denial, imprudent expansion, actions brought by competitors, allegation for false advertising.

Who can file a suit against the directors?

A suit against the director can be filed by receivers, liquidators and administrators, shareholders, factory inspectorate, enforcement directorate and other government bodies, creditors, customers and suppliers, employees.

The following claims are, however, not covered:

Wilful/intentional infringement of law, criminal behaviour, fraudulent and/or intentional acts or omissions of an insured, the gaining of any profit or advantage to which the insured was not legally entitled, Acts committed prior to the inception date of the Policy, libel, slander or other defamation, environmental damage or pollution, bodily injury or property damage, fines, penalties and other penal liability, Professional errors and omissions, Infringement of Copyright or Patent, in a capacity as trustee or fiduciary under law.

The policy cover in India is usually taken in the range of $2-5 million.

Errors and Omissions (E & O)

With companies’ stake increasing in IT solutions, it is likely that certain software solutions may be critical to the operation of the business. As a result, much more is at stake if the software fails or does not perform as promised. Contractual indemnification claims may arise from a software company’s breach of its obligations under the software licence agreement, such as for non-performance or defects in products or services. Claims may arise from loss of data, failures of delivery to key customers, or payroll delays, all potentially caused by software products or services that have gone wrong. Errors and omissions insurance can stand behind thinly-capitalised software companies to protect their customers from potentially catastrophic losses.

Coverage available under CGL policies is typically limited to third party claims for bodily injury, property damage and advertising injury. It may be difficult or impossible to get coverage under a CGL policy for injury to intangible property, such as software or data, because there has been no bodily injury or physical injury to or loss of use of tangible property. For example, if a software company’s product fails and causes a customer to lose valuable sales data, the company cannot typically rely on his CGL insurer to respond. However, the customer is likely to seek indemnity for the cost of recreating the lost data and for the lost revenues. CGL policies generally do not provide coverage for programming errors, contract performance disputes or any other professional liability issues. They also typically do not cover consequential financial loss, and most exclude claims arising out of professional services.

E&O insurance provides protection against the risks of failure of the policyholder’s/insured product to perform its function and the policyholder’s failure to perform services within the terms of the contract. For instance, E&O insurance would apply when a policyholder faced claims because its product caused a loss of data to others, including the loss of use of that data.

It would also apply if the policyholder’s product or service failed, causing the loss of use of tangible property to others (without physical injury).

Most E&O policies apply only to consequential damages, such as the customer’s loss of income or loss of data due to product failure. Coverage is also typically limited to losses that arise after the customer’s acceptance of the product or project.

If a business is sued because the software company’s product allowed third parties unauthorised access to intellectual property, such as trade secrets, or confidential personal information, such claims may not be covered, depending on the wording of the policy.

The policy cover in India is usually taken in the range of $10-50 million.

The author is the Head Legal of Polaris Software Lab Ltd ( k.satishkumar@polaris.co.in) Views expressed are personal.

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