UK: D&O Insurance On The Rise In Brazil

Last Updated: 3 August 2010
Article by James Cooper and Stuart Maleno

Directors and Officers (D&O) insurance is on the rise in Brazil. Depending on where you obtain the information, sales of D&O insurance in the first quarter of 2010 have grown by between 41 per cent and 45 per cent when compared to the same period in 2009.

Part of the growth is inevitably down to the fact that the market is still relatively new in Brazil and there is therefore substantial scope for growth. D&O insurance is not mandatory and, until relatively recently, the grounds upon which directors and officers could be held liable were limited. However, the fields in which directors and officers can be held liable for damages have widened and, consequently, actions against directors have increased significantly over the last few years. This has driven companies to seek D&O insurance.

The more recent growth spurt also seems to have been driven by new rules introduced by the Comissão de Valores Mobiliários (the CVM, which is the Brazilian securities regulator, the equivalent of the Securities and Exchange Commission (SEC) in the United States) last year, which have come into force this year. These rules are aimed at increasing the transparency between listed companies and the CVM and investors. Under these rules, those companies with D&O insurance must disclose this fact to the market, along with the level of cover taken out. It has been reported that this transparency has meant that companies can see who has what cover and for what amount, which has led to an increase in sales and in the levels of cover being taken out.

In addition to the growth of 'vanilla' D&O insurance, the market has also seen growth in cover of "termos de compromisso". "Termos de compromisso" is the term given to settlement agreements reached with the CVM whereby a CVM investigation is settled on the basis that the company under investigation agrees to certain conditions, as well as paying a settlement sum (which could be to the CVM or to third parties that have suffered a loss). It is arguable that payments by a company or director under these settlement agreements are 'settlements' and not 'fines', and so capable of being covered under a standard D&O policy. However, to avoid any doubt, a rising number of companies are taking the extra precaution of seeking policy endorsements that specifically cover payments under "termos de compromisso" and the costs incurred by the company in negotiating such a settlement with the CVM.

One further consequence of the new CVM rules is that the CVM will now know whether a company has D&O coverage and what that level of cover is. This already seems to have led to an increase in the sums that the CVM is requesting of companies for a matter to be settled under a "termo de compromisso".

Although the opening up of the Brazilian market is leading to certain elements of international D&O policies being incorporated into local policies, certain practices remain very different in Brazil to those that underwriters may be accustomed to in London. One of those areas is notification after the policy has expired.

Brazilian law allows for two possible extensions to a policy period for the purpose of notification. These are known as the "Prazo Complementar" and the "Prazo Suplementar". The "Prazo Complementar" will apply where the policy comes to an end and is not renewed with the same insurer, or there is no retroactive cover in the new policy. The "Prazo Complementar" will extend the policy period, for the purpose of notifications, by one year. No further premium is required. Only once the "Prazo Complementar" has run can the "Prazo Suplementar" then apply. The "Prazo Suplementar" must be offered under a policy, although the insured must pay an extra premium if it wishes to take advantage of such a period. If this premium is paid, the "Prazo Suplementar" will commence upon the expiry of the "Prazo Complementar". The minimum time period that may be offered for the "Prazo Suplementar" is one year, although longer may be offered.

Another area that underwriters must pay attention to regarding notifications arises from the fact that market practice has yet to develop in the same way as in the US and the UK. It is important that underwriters make clear their requirements when it comes to notification and what the implications of late notice are.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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