18 Sep D&O Civil Liability

The Superior Court of Justice has recently decided that fraudulent and dishonest acts favouring personal interests and practices, which are damaging to companies and the capital markets are not covered under the Directors and Officers (D&O) insurance policy of a corporate entity.

In the case in question, the insured party took advantage of inside information to obtain an advantage in his negotiation of shares of the company in which he serves as an officer. The officer’s acts were under investigation by the Brazilian Securities Commission (CVM) since March 2009.

However, when the company filled in the risk questionnaire presented by the insurer in November 2009, it omitted the existence of investigations against its directors and officers even though it was aware of the ongoing CVM investigation to examine fraudulent practices, which was demonstrated by the company’s  answers to official correspondence to the authority in this regard.

Notwithstanding such factual prove, the decision issued by the Superior Court of Justice took into account, as a legal principle, recent specific D&O insurance rule issued by the Superintendence of Private Insurance in October 2016 (Circular SUSEP No. 541/2016).

The highlight in the new SUSEP Circular rests in the express possibility of contracting insurance to cover contractual and administrative fines and penalties imposed on insured persons while in the exercise of their duties.  However, pursuant to article 5 of Circular SUSEP No. 541/2016, the insurer must only guarantee the reimbursement of compensation that policyholders are obliged to pay when they are the result of the administrator’s actions for damages caused to third parties as a consequence of negligent acts committed in the exercise of his/her functions to which they had been appointed, elected and/or hired.

Furthermore, according to article 6 of the above-mentioned Circular, the D&O insurance policy should not cover reimbursements related to the administrator’s civil liability for damages caused to third parties by the policyholders when they are not in the exercise of their functions.

The practice of insider trading, however, constitutes a malicious act by the policyholder and does not arise from management actions, that is, from activities necessary to perform his duties as administrator, but from a personal act, which is able to generate personal financial gains to the detriment of company.