The Risk

The risks faced by the directors and officers of any Company are already considerable. They include the risk of suits resulting from regulatory breach, employment practices violations, antitrust and competition rules, and outside directorships. However, upon issuance of shares to the public the risks increase hugely. Three main areas of heightened exposure to consider are Shareholders, Prospectus and Securities Regulator.

The IPO is likely to result in a large, diverse group of new shareholders. Statistically shareholders’ suits provide the vast majority of claims against directors and officers worldwide. The mix of shareholders is important, as these will include foreign investors as well as local retail investors, all of whom may have their own expectations for the performance of a company following the IPO. If these expectations are not met claims are sometimes likely to follow.

The IPO involves the submission of a prospectus, which provides prospective shareholders with considerable information about a company, including detailed accounting statistics and assumptions on historical and future performance. As this information is the main source from which the new shareholders of a company will make their investment decisions, it may also be the focus for litigation if shareholders suffer losses in the future. The exposure following IPO’s for companies worldwide has been historically very large.

A listing of shares on a stock exchange requires compliance with securities law. Statistically breaches of such rules and regulations have been the proximate cause of a large proportion of third party suits against companies worldwide. It is not only the directors and officers who should be concerned about the exposure arising from an IPO. The company itself should also be aware of its exposure as it is likely that in the event of a legal action for a breach of securities law, the company and the directors and officers will be implicated in any claim. In some cases the underwriters of the IPO can also face liability.

The Solution

Howden India provides Public Offerings of Securities (POSI) cover to clients against any actual or alleged wrongful acts of a company and its directors and officers arising from any Securities Claim arising from the prospectus issued.

The Cover

The policy provides coverage to -

  • The Directors, Officers or Employees of the Offering company
  • If the Offering company indemnifies its Directors and Officers then the company itself in relation to that indemnification.
  • The Offering company itself for Securities claims against it or them arising from their Wrongful Acts on account of the Offering.

Costs Covered

The insurance covers legal costs incurred in defending civil and criminal proceedings relating to prospectus liability as well as any judgements or settlements entered into.

Period of Cover

It is purchased for a period of three to six years for a single premium payment. However, other lengths of time can be considered by Underwriters.


The premiums vary according to the limits purchased, the scope of the warranties and indemnities and the legal jurisdictions which will apply to the prospectus.

Isn’t this also covered under the Directors’ and Officers’ Insurance?

Whilst a D&O policy may cover some of the claims that might arise they are not designed to address all the risks arising from a prospectus and listing process. Typically they do not cover claims against the company. Even if the policy is suitably worded, these policies are renewable annually for a new premium. Claims relating to a prospectus most often arise in the period 12 to 24 months after the prospectus was issued. On an annual D&O policy, premium may be increased or cover withheld on renewal if there is a potential prospectus claim.

How much cover will be needed?

There is no proven scientific or mathematical basis which can be adopted by an entity to determine an adequate indemnity limit. This is true especially for liability risks. Unlike physical assets where valuation can be precisely made since physical assets can be visibly seen, easily quantified and therefore easily insurable, it is very difficult to select a Limit of Indemnity for liability and financial risks. However selection of indemnity limit is generally dependent upon various factors like:

  • Issue size
  • Limit of Indemnity
  • Asset size
  • Risk Factors
  • Geographical exposures
  • Number of employees
  • Countries of operation
  • Ease of litigation
  • US Listing
  • Nature of operations
  • Past claim trends
  • Accounting Practices and revenue recognition policy
  • Financial Performance

The amount of cover required is generally less than the amount of the issue proceeds and often for up to 15-20% of the issue size or more. Where exposures arise under US Securities Laws higher limits are likely to be appropriate. Exclusions to the Cover

There are exclusions and these need to be reviewed carefully. As with all insurance, there is a duty of disclosure of material information to the underwriters. Some of the exclusions to the policy are:

  • Claims/Claim like incidents that are already known
  • Wilful / Intentional Infringement of Law
  • Criminal Behaviour
  • Fraudulent and/or Intentional Acts or Omissions of an Insured
  • Environmental Damage or Pollution
  • Bodily Injury or Property damage
  • Fines, Penalties and other matters uninsurable by law

Excess or deductible

Typically there is an excess for claims made against the company and this is normally limited to a maximum amount regardless of the number of claims. It is usual for the directors to have no excess on claims against them personally.