Copyright © Lehman, Lee & Xu All Rights Reserved Director and Officer Liability Insurance in the...

Copyright © Lehman, Lee & XuAll Rights Reserved

Director and Officer Director and Officer Liability Insurance in Liability Insurance in the People’s Republic the People’s Republic

of Chinaof China

Edward E. LehmanEdward E. LehmanLEHMAN, LEE & XULEHMAN, LEE & XU

Copyright © Lehman, Lee & Xu

DefinitionDefinition

D&O Insurance:D&O Insurance: - D&O insurance is a legal liability D&O insurance is a legal liability

policy which provides for wrongful policy which provides for wrongful acts made by a Director or Officer acts made by a Director or Officer of a company or its subsidiary of a company or its subsidiary whilst engaged in such capacity. whilst engaged in such capacity.

- The policy is always triggered by an The policy is always triggered by an allegation of wrongful act brought allegation of wrongful act brought against the Director or Officer, against the Director or Officer, either in writing or verbal either in writing or verbal communication. communication.


Growth of Growth of D&O D&O

InsurancInsurancee

in PRC. in PRC.


China sits as the fourth largest economy in the world. China sits as the fourth largest economy in the world. ( U.S., Japan, Germany, China);( U.S., Japan, Germany, China);

In 2006, the new Company law places duties of Loyalty In 2006, the new Company law places duties of Loyalty and Due Diligence towards a company on its senior and Due Diligence towards a company on its senior executive; executive;

Directors and Officers can be held jointly or severally Directors and Officers can be held jointly or severally liable for actions such as false or misleading records, liable for actions such as false or misleading records, disclosure omissions or others causing loss to the disclosure omissions or others causing loss to the company;company;

Shareholders are allowed to bring derivative claims or Shareholders are allowed to bring derivative claims or direct claims against executives and the company;direct claims against executives and the company;

How the individual property of directors How the individual property of directors and officers be protected against the law and officers be protected against the law suit?suit?


Insurance Law of PR ChinaInsurance Law of PR China - - Liability insurance refers to insurance that makes the liabilit Liability insurance refers to insurance that makes the liabilit

y to indemnities of the insured to the third party as the objecy to indemnities of the insured to the third party as the object.t.

Administrative Codes of Listed CompaniesAdministrative Codes of Listed Companies - - Upon approval by the shareholders’ general meeting, listed Upon approval by the shareholders’ general meeting, listed

companies are allowed to purchase insurance for their directcompanies are allowed to purchase insurance for their directors save for liabilities resulting from the directors’ breach of ors save for liabilities resulting from the directors’ breach of the laws or regulations or articles of association.the laws or regulations or articles of association.

The Guide for Establishing the Independence Director InstThe Guide for Establishing the Independence Director Institution of Listed Company itution of Listed Company

- - Listed companies are allowed to establish a compulsory IndeListed companies are allowed to establish a compulsory Independent Directors’ Liability Insurance mechanism to reducpendent Directors’ Liability Insurance mechanism to reduce the risks associated with the ordinary performance of the de the risks associated with the ordinary performance of the duties of independent directors.uties of independent directors.


In 2002, Ping An and Chubb jointly issued the D&O In 2002, Ping An and Chubb jointly issued the D&O insurance policy upon approval by the China Insurance insurance policy upon approval by the China Insurance Regulatory Commission (CIRC), and VANKE Joint Stock Regulatory Commission (CIRC), and VANKE Joint Stock Limited Company ( One of the largest real estate Limited Company ( One of the largest real estate company in China) became the first insurant;company in China) became the first insurant;

In recent years since 2002, PICC, Ping An, Huatai(Ace), In recent years since 2002, PICC, Ping An, Huatai(Ace), AIU, Chubb, Allianz provide D&O Insurance in the local AIU, Chubb, Allianz provide D&O Insurance in the local market. market.

More than 90% of American companies and European More than 90% of American companies and European companies and 60%-70% of HK companies purchase companies and 60%-70% of HK companies purchase D&O insurance VS no more than 2% of Chinese D&O insurance VS no more than 2% of Chinese ( Mainland China) listed companies purchase D&O ( Mainland China) listed companies purchase D&O insuranceinsurance

There are a lot of opportunities and a There are a lot of opportunities and a huge potential market for Foreign-huge potential market for Foreign-invested Insurance Companies in China. invested Insurance Companies in China.


Case Case StudyStudy


Case ACase A

A class action lawsuit was filed on May 10, 2004, on behalf of purchasers A class action lawsuit was filed on May 10, 2004, on behalf of purchasers of the securities of China Life Insurance Company Limited ("China of the securities of China Life Insurance Company Limited ("China Life") (NYSE: LFC) between December 17, 2003 and February 3, 2004, Life") (NYSE: LFC) between December 17, 2003 and February 3, 2004, seeking to pursue remedies under the Securities Exchange Act of 1934 seeking to pursue remedies under the Securities Exchange Act of 1934 (the "Exchange Act"). The action was filed before the Honorable Colleen (the "Exchange Act"). The action was filed before the Honorable Colleen McMahon, in the United States District Court for Southern District of McMahon, in the United States District Court for Southern District of New York against defendants China Life, President and Chairman of New York against defendants China Life, President and Chairman of China Life, Wang Xianzhang, and Directors of China Life, Long Yongtu, China Life, Wang Xianzhang, and Directors of China Life, Long Yongtu, Chau Tak Hay, Miao Fuchun and Wu Yan. According to the complaint, Chau Tak Hay, Miao Fuchun and Wu Yan. According to the complaint, defendants violated the Exchange Act by issuing a series of material defendants violated the Exchange Act by issuing a series of material misrepresentations to the market during the class period. misrepresentations to the market during the class period.

China life was founded in June 2003 through the restructuring of its state-China life was founded in June 2003 through the restructuring of its state-owned parent company, China Life Insurance (Group) Co. (“CLIC”). On owned parent company, China Life Insurance (Group) Co. (“CLIC”). On February 3, 2004, the National Audit Office of China ("NAO") reported February 3, 2004, the National Audit Office of China ("NAO") reported the results of its audit of CLIC and that it had found the equivalent of the results of its audit of CLIC and that it had found the equivalent of about $652 million worth of irregularities involving CLIC. On February about $652 million worth of irregularities involving CLIC. On February 4, 2004, the price of China Life's American Depository Shares declined in 4, 2004, the price of China Life's American Depository Shares declined in reaction to this news, falling $2.13 or 7.39% per share from its previous reaction to this news, falling $2.13 or 7.39% per share from its previous day's closing price, to close at $26.67. As a result of the defendants' false day's closing price, to close at $26.67. As a result of the defendants' false disclosure during the IPO, the price of China Life’s securities was disclosure during the IPO, the price of China Life’s securities was artificially inflated during the class period, causing Plaintiff and other artificially inflated during the class period, causing Plaintiff and other members of the class to suffer injuries.members of the class to suffer injuries.


Case BCase B

On Dec 28, 2004, the Yinguangxia Listed Company (ShOn Dec 28, 2004, the Yinguangxia Listed Company (Shenzhen Stock Exchange 000557) was sued before Yinchenzhen Stock Exchange 000557) was sued before Yinchuan Intermediate People’s Court by the investor – Bo Suan Intermediate People’s Court by the investor – Bo Songhua for exaggerating their profits and disclosing falonghua for exaggerating their profits and disclosing false annual reports since Aug 5, 2001. The investor had pse annual reports since Aug 5, 2001. The investor had purchased 5,500 shares of Yinguangxia from Apr 23, 200urchased 5,500 shares of Yinguangxia from Apr 23, 2001 to Jul 4, 2001. However, the price of the stocks had be1 to Jul 4, 2001. However, the price of the stocks had been extremely decreased due to Yinguangxia’s false infoen extremely decreased due to Yinguangxia’s false information. The judge concluded that Yinguangxia shall prmation. The judge concluded that Yinguangxia shall pay RMB110, 000 Yuan to compensate the investor’s daay RMB110, 000 Yuan to compensate the investor’s damages. mages.


Role of Governing Role of Governing Authority in D&O Authority in D&O

insuranceinsurance

China Insurance Regulatory CommissionChina Insurance Regulatory Commission (CRIC)(CRIC) If insurers want to engage in D&O insurance business: If insurers want to engage in D&O insurance business: 1. The business scope shall include 1. The business scope shall include “ “ property insurance”;property insurance”; 2. Such business scope shall be approved by the 2. Such business scope shall be approved by the CRIC;CRIC; 3. The proposed D&O insurance policy shall be 3. The proposed D&O insurance policy shall be also approved by the CRIC. also approved by the CRIC.

There is no specific restriction for Foreign-invested There is no specific restriction for Foreign-invested Insurance Companies to engage in this area. Insurance Companies to engage in this area.


The Parties involved in The Parties involved in D&O InsuranceD&O Insurance

The Insurer: The Insurer:

- - Insurance CompaniesInsurance Companies The Insurant: The Insurant:

- Companies;- Companies;

- Directors and Officers- Directors and Officers The Insured: The Insured:

- - Directors and OfficersDirectors and Officers


Scope of D&O Scope of D&O Insurance Insurance CoverageCoverage

TThe Insurer shall pay on behalf of the he Insurer shall pay on behalf of the Insureds allInsureds all Loss Loss and/or shall pay on behalf of and/or shall pay on behalf of the Company all Loss which the Company is the Company all Loss which the Company is legally required or permitted to pay the legally required or permitted to pay the Insureds as advancements or indemnity under Insureds as advancements or indemnity under applicable company indemnity laws, applicable company indemnity laws, regulations or agreement, for anyregulations or agreement, for any Claim Claim against the Insureds for a against the Insureds for a Wrongful ActWrongful Act, , provided the Claim is first against the Insureds provided the Claim is first against the Insureds during the during the Policy PeriodPolicy Period. .


Wrongful Wrongful ActsActs

Any actual or alleged act, error, Any actual or alleged act, error, omission, breach of duty, omission, breach of duty, misstatement or misleading misstatement or misleading statement by the Insureds statement by the Insureds (Directors and Officers) while (Directors and Officers) while acting in their capacity of the acting in their capacity of the Company or its subsidiaries. Company or its subsidiaries.


Liabilities of D&OLiabilities of D&O 　Ⅰ　Ⅰ The Company Law of PRC – Article 21The Company Law of PRC – Article 21 Neither the controlling shareholder, nor the actual Neither the controlling shareholder, nor the actual

controller, nor any of the directors, supervisors or scontroller, nor any of the directors, supervisors or senior management of the company may injure the enior management of the company may injure the interests of the company by taking advantage of its interests of the company by taking advantage of its connection relationship. Anyone who causes any lconnection relationship. Anyone who causes any loss to the company due to violating the preceding oss to the company due to violating the preceding paragraph shall be liable for the compensation. paragraph shall be liable for the compensation.


Liabilities of D&OLiabilities of D&O 　Ⅱ　Ⅱ The Company Law of PRC – Article 113The Company Law of PRC – Article 113

The directors shall be responsible for the resolutionThe directors shall be responsible for the resolutions of the board of directors. Where a resolution of ths of the board of directors. Where a resolution of the board of directors is in violation of any law, admie board of directors is in violation of any law, administrative regulation, articles of association, or resnistrative regulation, articles of association, or resolution of the shareholders' assembly and causes aolution of the shareholders' assembly and causes any serious loss to the company, the directors who ny serious loss to the company, the directors who participate in adopting the resolution shall make cparticipate in adopting the resolution shall make compensation. However, if a director is proven to hompensation. However, if a director is proven to have expressed his objection to the vote on such resave expressed his objection to the vote on such resolution and his objection was recorded in the minuolution and his objection was recorded in the minutes, then the director may be exempted from liabilites, then the director may be exempted from liability. ty.


Liabilities of D&OLiabilities of D&O 　Ⅲ　Ⅲ The Company Law of PRC – Article 150The Company Law of PRC – Article 150

Where any director, supervisor or senior manager viWhere any director, supervisor or senior manager violates any law, administrative regulation, or the arolates any law, administrative regulation, or the articles of association during the course of performinticles of association during the course of performing his duties, if any loss is caused to the company, hg his duties, if any loss is caused to the company, he shall be liable for compensation. e shall be liable for compensation.


Liabilities of D&OLiabilities of D&O 　Ⅳ　Ⅳ the Security Law of PRC – Article 68the Security Law of PRC – Article 68

The directors, supervisors and senior The directors, supervisors and senior

managers of a listed company shall managers of a listed company shall guarantee the authenticity, accuracy guarantee the authenticity, accuracy and integrity of the information as and integrity of the information as disclosed by their listed company.disclosed by their listed company.


Liabilities of D&O ⅤLiabilities of D&O Ⅴ the Security Law of PRC – Article 69the Security Law of PRC – Article 69

Where the prospectus, measures for financing through Where the prospectus, measures for financing through issuance of corporate bonds, financial statement, listing issuance of corporate bonds, financial statement, listing report, annual report, midterm report, temporary report report, annual report, midterm report, temporary report or any information as disclosed that has been or any information as disclosed that has been announced by an issuer or a listed company has any announced by an issuer or a listed company has any false record, misleading statement or major omission, false record, misleading statement or major omission, and thus incurs losses to investors in the process of and thus incurs losses to investors in the process of securities trading, the issuer or the listed company shall securities trading, the issuer or the listed company shall be subject to the liabilities of compensation. Any be subject to the liabilities of compensation. Any director, supervisor, senior manager or any other director, supervisor, senior manager or any other person of the issuer or the listed company directly person of the issuer or the listed company directly responsible shall be subject to the joint and several responsible shall be subject to the joint and several liabilities of compensation, except for anyone who is liabilities of compensation, except for anyone who is able to prove his exemption of any fault.able to prove his exemption of any fault.


ClaimClaim Civil Claim;Civil Claim; Criminal Claim;Criminal Claim; Individual Individual

Request; Request; Official Official

Investigation, Investigation, etc. etc.


Who Can Sue?Who Can Sue?


CompanyCompany Where any director or officer violates any law,Where any director or officer violates any law,

administrative regulation, or the articles of administrative regulation, or the articles of association during the course of performing association during the course of performing his duties, if any loss is caused to the comphis duties, if any loss is caused to the company, he shall be liable for compensation. Thany, he shall be liable for compensation. The company has right to sue the liable directe company has right to sue the liable director or officer for such kind of compensation.or or officer for such kind of compensation.


SupervisorsSupervisors Where a director or officer is responsible to the Where a director or officer is responsible to the

loss caused to the company by its violation of loss caused to the company by its violation of law or regulation, the shareholders of the law or regulation, the shareholders of the limited liability company or joint stock limited limited liability company or joint stock limited company separately or aggregately holding 1% company separately or aggregately holding 1% or more of the total shares of the company for or more of the total shares of the company for 180 consecutive days or more 180 consecutive days or more ((the the “Shareholders”“Shareholders” ) ) may request in writing may request in writing ((the the “Request”“Request” ) ) the board of supervisors or the the board of supervisors or the supervisor of the limited liability company with supervisor of the limited liability company with no board of supervisors to initiate a lawsuit in no board of supervisors to initiate a lawsuit in the people's court. the people's court.

The board of supervisors or the supervisor of The board of supervisors or the supervisor of the limited liability company with no board of the limited liability company with no board of supervisors shall fulfill its obligation to the supervisors shall fulfill its obligation to the company to be responsible to the lawsuit.company to be responsible to the lawsuit.


Shareholder Derivative ActionShareholder Derivative Action If the board of supervisors, or supervisor of a If the board of supervisors, or supervisor of a

limited liability company with no board of limited liability company with no board of supervisors refuses to lodge a lawsuit after it supervisors refuses to lodge a lawsuit after it receives receives the Requestthe Request, or if it fails to initiate a , or if it fails to initiate a lawsuit within 30 days after it receives lawsuit within 30 days after it receives the the RequestRequest, or if, in an emergency, the failure to , or if, in an emergency, the failure to lodge an action immediately will cause lodge an action immediately will cause unrecoverable damages to the interests of the unrecoverable damages to the interests of the company, company, the Shareholdersthe Shareholders may, on their may, on their own behalf, directly lodge a lawsuit in the own behalf, directly lodge a lawsuit in the people's court.people's court.


Shareholder Direct ActionShareholder Direct Action

If any director or officer damages the If any director or officer damages the shareholders' interests by violating any shareholders' interests by violating any law, administrative regulation, or the law, administrative regulation, or the articles of association, the shareholders articles of association, the shareholders may lodge a lawsuit in the people's may lodge a lawsuit in the people's court.court.


Statute Limitation of Statute Limitation of the Claimthe Claim

Civil Claim:Civil Claim: 2 years in general;2 years in general; Since the entitled person knows or Since the entitled person knows or

should known its rights are infringed should known its rights are infringed upon;upon;

No more than 20 years since the No more than 20 years since the infringement; infringement;

The People’s court many extent the The People’s court many extent the limitation under specific circumstances.limitation under specific circumstances.


Criminal Claim:Criminal Claim:

Crimes shall not be prosecuted if the following periods have Crimes shall not be prosecuted if the following periods have elapsed: elapsed:

a.a. Five years if the maximum prescribed punishment is fFive years if the maximum prescribed punishment is fixed-term imprisonment of less than five years;ixed-term imprisonment of less than five years;

b.b. Ten years if the maximum prescribed punishment is fTen years if the maximum prescribed punishment is fixed-term imprisonment of more than five years and less thaixed-term imprisonment of more than five years and less than ten years; n ten years;

c.c. Fifteen years if the maximum prescribed punishment Fifteen years if the maximum prescribed punishment is fixed-term imprisonment of more than ten years; andis fixed-term imprisonment of more than ten years; and

d.d. Twenty years if the maximum prescribed punishment Twenty years if the maximum prescribed punishment is life imprisonment or death. Where, after twenty years, it is is life imprisonment or death. Where, after twenty years, it is considered that a crime must be prosecuted, the matter musconsidered that a crime must be prosecuted, the matter must be reported to the Supreme People's Procuratorate for appt be reported to the Supreme People's Procuratorate for approval.roval.


Employment Disputes: Employment Disputes:

Arbitration first: Arbitration first:

- - file a written application to a labor file a written application to a labor dispute arbitration committee within dispute arbitration committee within 60 days starting from the date of the 60 days starting from the date of the occurrence of a labor dispute;occurrence of a labor dispute;

Lawsuit to a People’s Court: Lawsuit to a People’s Court:

- - within 15 days from the date of within 15 days from the date of receiving the ruling of arbitration.receiving the ruling of arbitration.


Contractual Disputes:Contractual Disputes: 2 years in general;2 years in general; Since the date on which the entitledSince the date on which the entitled party knows or should know its rights party knows or should know its rights are infringed upon. are infringed upon.

Shareholders’ Action:Shareholders’ Action: No specific provisions;No specific provisions; Comply with Civil Law, Criminal Law Comply with Civil Law, Criminal Law

and and Contract Law of PRC respectively.Contract Law of PRC respectively.


LossLoss

Actual Damages ( no punitive or Actual Damages ( no punitive or exemplary damages in general);exemplary damages in general);

Judgments;Judgments; Settlements;Settlements; Defence Costs ( may be paid by Defence Costs ( may be paid by

the Insurer in advance), etcthe Insurer in advance), etc. .


ExtensionsExtensions


Intentional acts;Intentional acts;

- - Any claim brought by or on behalf of the Any claim brought by or on behalf of the Insureds or the Company other than any claim: Insureds or the Company other than any claim:

arising from an Employment Practice Liability;arising from an Employment Practice Liability; instigated by a shareholder or group of shareholders of instigated by a shareholder or group of shareholders of

the Company in the name of the Company without the the Company in the name of the Company without the participation, solicitation or assistance of any Insureds participation, solicitation or assistance of any Insureds or the Company;or the Company;

instigated by a receiver or a liquidator without the instigated by a receiver or a liquidator without the participation, solicitation, or assistance of the Insureds participation, solicitation, or assistance of the Insureds or the Company;or the Company;

for contribution or indemnity, if the Claim for for contribution or indemnity, if the Claim for contribution or indemnity directly results from a Claim contribution or indemnity directly results from a Claim which is covered under this Policy.which is covered under this Policy.


ExtensionsExtensions Dishonest or fraud acts;Dishonest or fraud acts; Criminal acts;Criminal acts; Fine, Penalty or Tax;Fine, Penalty or Tax; Pollution liability;Pollution liability; Known circumstances;Known circumstances; Property damages;Property damages; Body injury or Emotional Body injury or Emotional

distress; distress; etc. etc.


Insurance Insurance Compensation Compensation

ProcedureProcedure

11 22

The Claim

Directors and Officers

The Insurer


Insurance Insurance Compensation Compensation

ProcedureProcedure

The Claim The Directors and Officers

The Company

The Insurer

1

2

3


Discovery Period & Discovery Period &

Extended Reporting PeriodExtended Reporting Period Discovery period is the date when the claim or Discovery period is the date when the claim or

circumstances are made known to the insured. circumstances are made known to the insured.

Extended reporting period is the period usually granted Extended reporting period is the period usually granted (either with additional premium or free, depending on the (either with additional premium or free, depending on the length or duration provided) to the insured to report the length or duration provided) to the insured to report the claims to the insurer relating to the wrongful acts claims to the insurer relating to the wrongful acts committed while the policy period is still in force. committed while the policy period is still in force. Extended reporting period is usually granted when the Extended reporting period is usually granted when the policy will not be renewed with the existing insurer.policy will not be renewed with the existing insurer.

There are no specific laws and regulations with regard to There are no specific laws and regulations with regard to offering an extended reporting period or discovery period offering an extended reporting period or discovery period in China. However, according to the Insurance Law of in China. However, according to the Insurance Law of PRC, the insurer and the insured are entitled to reach PRC, the insurer and the insured are entitled to reach agreements through consultation and free will without agreements through consultation and free will without infringing public interests and compulsory standards. infringing public interests and compulsory standards.


Claims made policyClaims made policy

There are no specified laws or There are no specified laws or regulations regarding the claims made regulations regarding the claims made policy or the occurrence policy. However, policy or the occurrence policy. However, in practice, a claims made policy is in practice, a claims made policy is permitted by CRIC, which means permitted by CRIC, which means regardless of how long ago a wrongful regardless of how long ago a wrongful act complained of was committed, the act complained of was committed, the policy will respond provided that the policy will respond provided that the claims is made during the policy period claims is made during the policy period or the extended reporting period subject or the extended reporting period subject to the retroactive date stated in the to the retroactive date stated in the policy schedule.policy schedule.


Market Market ShareShare

Local InsurersLocal Insurers

Property Property InsurancInsurancee

Health Health InsurancInsurancee

PICCPICC

62.61%62.61%China China LifeLife

51.05%51.05%

CPICCPIC

11.87%11.87%Ping AnPing An

16.93%16.93%

Ping AnPing An

9.12%9.12%CPICCPIC

10.47%10.47%


Market Market ShareShare

Foreign-invested Foreign-invested InsurersInsurers

PropertyProperty

InsurancInsurancee

HealthHealth

InsurancInsurancee

1.15%1.15%

(AIU (AIU ranks ranks first with first with 0.35%)0.35%)

5.79%5.79%

( AIG ( AIG ranks ranks first with first with 1.26%)1.26%)


ConclusionConclusion

Pursuant to China’s WTO accession commitments, as of Pursuant to China’s WTO accession commitments, as of today, there is almost no restriction and prohibition for today, there is almost no restriction and prohibition for foreign-fund insurance companies to practice in foreign-fund insurance companies to practice in insurance business. However, the foreign-found insurance business. However, the foreign-found insurance companies account for much lower market insurance companies account for much lower market share than the Chinese local insurance companies. share than the Chinese local insurance companies.

In recent years, D&O insurance has become a core In recent years, D&O insurance has become a core component of corporate insurance. However, D&O component of corporate insurance. However, D&O Insurance is relative new business in China. Until now, Insurance is relative new business in China. Until now, there are no specific laws and regulations in this field. It there are no specific laws and regulations in this field. It is not until Oct 27, 2005 that China promulgated the is not until Oct 27, 2005 that China promulgated the new Corporation Law which imposes personal liabilities new Corporation Law which imposes personal liabilities upon directors and officers due to their wrongful acts. upon directors and officers due to their wrongful acts. We believe, with envelopment and enforcement of the We believe, with envelopment and enforcement of the legal system of directors and officers liability, there is a legal system of directors and officers liability, there is a critical need for directors and officers to protect critical need for directors and officers to protect themselves from increasing law suits. themselves from increasing law suits.

Copyright © Lehman, Lee & Xu All Rights Reserved Director and Officer Liability Insurance in the...

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