News published by the DCI newspaper: D&O cannot cover fines for insider trading

Who was possible the “director”? And the company?
By Ricardo Bomfim
São Paulo – The Superior Court of Justice (STJ) has set a precedent by dismissing the appeal field by an executive and establishing that insurance companies are not to indemnify officers who commit insider trading crimes.
The issue was judged after that a company’s director, found guilty for trading shares based on privileged information (insider trading), requested the Directors & Officers Liability Insurance company (RC D&O) to pay a fine imposed by the Brazilian Securities and Exchange Commission (CVM).
The director appealed to the Court of Appeals of São Paulo (TJSP) to call for the coverage. However, the hypothesis was ruled out both because the insider trading is an illegal conduct, reason why it would not be covered by any insurance, and because the company omitted to tell it was being investigated by CVM at the time it signed the agreement with the insurance company.  Outraged by the decision, the director appealed to the STJ, claiming he/she was not aware of the ongoing investigations.
According to the partner of the Strategic Litigation and Arbitrage Department of the Siqueira Castro Advogados Law Firm, Ms. Adriana Conrado Zamponi, insurances, in general, have legal and regulatory limitations. “The regulation of Susep [Superintendence of Private Insurance], for example, exclude coverage for malicious acts. What the insurance covers are unintentional acts resulting from negligence, recklessness or malpractice,” she says.
According to the rapporteur of the appeal at the STJ, Justice Ricardo Villas Bôas Cueva, a decision in favor of the responsibility of the insurance company would represent a serious risk to the corporate governance. “[…] to prevent the diligence level from being significantly reduced […], what would negatively affect both the company’s compliance activity and the good corporate governance practices, the insurance policy cannot cover malicious acts, mainly those that favor the director himself/herself,” he pointed out in his vote, followed by the Justices of STJ’s Third Judging Panel.
Alexandre Kawakami, professor at the Instituto de Direito Público de São Paulo – IDP-SP, points out that insurance companies can reject the contract or increase the charges if the company is under investigation. For this reason, he says, the courts usually consider the omission of information by the insured parties as bad faith. “The STJ received evidence that the company had replied to CVM’s letters during the course of the investigations, what rules out the possibility claimed by the director, that is, that he/she was not aware of the process,” Kawakami explains.
On the other hand, Adriana says that insurance companies are not always entirely exempt, at least in the beginning, from making payments in a process like this one. According to her, some specific provisions in the contracts can expect the coverage of court costs. “The cost issue is not in the general provisions, but in a specific rule,” Adriana explains.
The coordinator of the Civil Liability Commission of the Union of Insurance Brokers in the State of São Paulo (Sincor-SP), Felippe Barreto, adds that, even in cases like that, the insurance company can request the Court not to be obliged to pay the fine.
“Practically all civil liability insurance companies cover the attorney fees, but when a malicious act is properly shown, they receive the money back since insuring a crime is to lose the essence of the insurance,” he concludes.
Click here to access the article published at DCI website.