Insurance now available for Insolvency Professionals

Insolvency Professionals (IPs) working on resolution process under the Insolvency and Bankruptcy Code (IBC) can now buy insurance covers for themselves. “The first such policy was designed by JLT Independent about three months back,” said Sanjay Radhakrishnan, CEO, of the insurance broking firm. It has designed four policies of the total five to six that have been issued so far. JLT Independent is working with with London-based Llyods an insurance and re-insurance firm for designing these policies.

Need for insurance

An IP is exposed to very high risk because anybody who buys the company, or the creditor bank, or investors in case of a listed company could sue the IP for not running the company properly.

For instance, a bank could raise a question that during the resolution period the IP didn’t run the company properly. Or one of the investors (in case of a listed company), could take a stance that had the IP had run the company in a particular manner, or done certain things, then the value from the sale of the company could have been 10-20% higher. They could even sue the IP.

Or in another instance, the solvent company had not taken a loss of profit cover because of the cost. Then due to a breakdown of a critical machinery, production stops and the already-loss making company, suffers further losses. If the company is looking for buyers, then the price it is likely to fall further. In such a case the IP will be held responsible

“There is demand for such policies, but no Indian insurance company offers them. They are unable to apply for such policies because they don’t have data on potential losses, what is the provisioning the company is likely to do and so on. The law itself is new in India,’’ Radhakrishnan explained.

According to Sameer Kakar, a Mumbai-based insolvency professional, some risks faced by IPs include missing out on compliance and lawsuits. “Often IPs start working on the resolution process without knowing anything about the company they are going to handle. And they are expected to complete the entire process within a particular span of time. So there are bound to be some slip-ups,’ he said.

How does the product work

The product is a combination of professional indemnity policy and a director and officers liability insurance (D&O) cover for the individual. The cover is offered for a period of at least three to five years post the resolution transaction because claims could arise and the IP is responsible under the law. The policies are taken by the individual IPs themselves who are working with insolvent companies. Or by companies and consultancy firms that have started offering solvency services.

The sum assured varies anywhere between $3 million to $40 million depending on how big the resolution transaction is. The premium depends on the indemnity amount. “It depends on what could be the potential lawsuit, potential damages and legal costs for the IP. We suggest a limit based on the kind of work the IP is doing, the size of the resolution transaction and the qualification of the IP. The higher the qualification, lower is the premium. The assumption is that an IP who is better qualified would be able to run the company better,’ Radhakrishnan added.

Protection for IPs

IPs face the risk of lawsuits, claims by creditors/investorsIf the solvent company had failed to take insurance then IP has to bear the riskCoverage lasts for three to five years post the resolution transaction. #casansaar