Directors and Officers’ Liability Insurance (D&O) is popular throughout Europe and North America and has been used for the sole benefit of directors and officers. Overall the foundation of the popularity is quite diverse. In my opinion, the most important is that such insurance will assist a company in attracting and retaining qualified directors and officers.
On the contrary, D&O has not been as popular in China. This is largley due to China’s imperfect system surrounding director’s liability. On January 7th 2002, the Guideline for the Management of the Listed Company was jointly issued by the China Securities Regulatory Commission of the PRC (CSRC)and the State Economic and Trade Commission (now known as MOFCOM). Article 39 of the Guideline stipulates: "the domestically listed companies can purchase Directors and Officers Liability Insurance upon the approval of the general meeting of the shareholder". 16 days later, the first D&O policy in China was set for launch through joint efforts by China’s largest insurance company, China Ping An Insurance Co., Ltd., and Chubb Insurance Group. Although to date many Chinese listed companies pay close attention to D&O, D&O has not gained the popularity as experienced in developed countries. In China’s insurance market, only a few insurance companies such as Ping An Insurance Company and AIU Property Insurance Company have sold D&O in the past.
Why is D&O put on the back shelf and neglected in China? My opinion is as follows:
First, there are few provisions and rules under Chinese law stipulating the directors and officers’ liability to a third party rather than to the company itself. Article 43 of the General Principles of the Civil Law of the PRC stipulates "An enterprise as legal person shall bear civil liability for the operational activities of its legal representatives and other personnel". And Article 58 of the Opinions of the Supreme People’s Court on Several Issues concerning the Implementation of the General Principles of the Civil Law of the People’s Republic of China has the same provision, which means, the directors and officers of a company bear no liability to the damages incurred by a third person if the directors or the officers act within their enterprises’ authorization. The directors and officers only bear liabilities to the Company due to their wrongful acts.
Although Some Provisions of the Supreme People’s Court on Trying Cases of Civil Compensation Arising from False Statement in Securities Market issued in 2003 provides that "A case of civil compensation arising from false statement in securities market mentioned in the present provisions shall refer to a case of civil compensation for which an investor in securities market brings a lawsuit to the people’s court against the obligor for information disclosure who violates legal provisions by making false statement and thus causing losses to him”…"an investor mentioned in the present provisions shall refer to a natural person, legal person or any other organization that engages in securities subscription or transaction in the securities market”, which means a third person who incurs damages due to the directors’ or officers’ wrongful act may sue against the natural person directly. Unfortunately, at that time, there was no system under China’s old Company Law for a Shareholders’ Derivative Suit. Therefore, the directors or officers are seldom personally liable.
Additionally, Article 50 of the Insurance Law stipulates "the insurer shall, according to the provisions of law or the agreement in the contract, directly pay the sum insured to the third party if damages are caused by the insured covered by the liability insurance". However, under many provisions of the Chinese Legal system, the insured directors and officers are not directly liable for a third party’s damages if a exclusion clause in a D&O policy excludes the coverage of the directors’ liability to the company. Also, the Insurance company will not pay for the insured even if a D&O policy was purchased. Thus, the coverage of D&O is limited in China.
Finally, although the decision to purchase D&O is subject to the approval of the shareholders general meeting, in China, the general meeting is controlled by only one or two controlling shareholders and directors are appointed by them, On this basis the minority shareholder has no say in contemplating the purchase of D&O.