Presented at the Conference on Good Corporate Governance, Bangkok, Thailand November 30-December 1, 1998

Good morning.

I have been asked to brief you in the next 1¼ hours on the following topics:

  1. Rising accountability and exposure of directors and officers of companies.
  2. Understanding directors’ and officers’ ("D&O") insurance.
  3. Why directors’ and officers’ insurance is vital.
  4. Coverage provided under directors’ and officers’ insurance.

Before digging into the subject, I wish to acknowledge several people who assisted in my presentation by providing background information and responding to my many questions on D&O insurance in Thailand:

  1. Mr. Leighton Fowles, Managing Director of Thailand Reinsurance Brokers Co., Ltd.,
  2. Miss Atchaporn Nunjuntee of Royal and Sun Alliance Insurance (Thailand) Ltd., and
  3. Mr. David Sims of Lamancha Co., Ltd., insurance consultants and brokers.

For purposes of this briefing, I have directed my remarks exclusively to Thailand situations, companies and laws.

A. Rising Accountability And Exposure Of Directors And Officers Of Companies

As the subject of "Responsibilities & Liabilities of Company Directors" is being probed this afternoon by my colleague from another law firm, thankfully I won’t have to start with an in-depth study of that topic. But any comments about D&O insurance don’t make much sense without establishing the context in which this type of insurance applies. So, at the expense of some overlap, let me set the stage of directors’ and officers’ legal liabilities in Thailand.

First, Thai law recognizes only directors, representatives, managers, staff, employees, and agents of companies. The offices of "President", "Vice President", "Secretary", "Treasurer", "CEO", "COO", "CFO", and even "Managing Director", as well as their deputies, assistants, associates, etc., have no grounding or recognition in Thai law. The titles are all honorific, only describing by common usage where someone is or stands within the hierarchy of an organization.

If directors are elected by the shareholders of a company, where do "officers" come from? Remembering that "officers" are not found or defined in Thai law with a specified set of duties and responsibilities, they usually are positions within a company created by the Board of Directors with only those powers and duties expressly delegated to them by the Board. So, which positions are deemed "officers" is a matter of Board of Directors action, and as defined by the issuer of D&O insurance policies.

Next, what is the source of defining the responsibilities and duties of directors? The answer is open-ended, but essentially one could say "from the law". The fundamental general law governing private limited liability companies is the "Civil and Commercial Code". Other laws for newer types of juristic persons, i.e. all being creations of law, also detail the responsibilities and liabilities of their directors. The Public Limited Companies Act B.E. 2535 (A.D. 1992) is such an example. Similarly, State Enterprises created by special laws cover such issues in their "enabling" legislation. (Sorry for the use of so many legal terms but they do have precise meanings.)

What are some of those responsibilities and liabilities of directors? The details are lengthy and are discussed in some detail in Attachment I, being my 1993 paper entitled, "Legal Liability of Directors under Thai Law". In general, directors are charged by law and the Memorandum and Articles of Association of a company with managing, administering and directing that company and its affairs to meet the objectives of the company, having a general duty of care to the shareholders. To achieve this purpose, directors are given by law and the company’s charter an extensive list of responsibilities, duties and powers. Each director must exercise his or her powers honestly, and in the best interests of the shareholders and the company. Directors must exercise the judgment of careful businesspersons, and they should not put themselves into positions whereby their duties and personal interests are likely to conflict with those of the company or its shareholders.

The failure to properly execute those responsibilities and duties could subject the individual offending directors to a plethora of both civil and criminal liabilities and penalties. That means the duty of care of directors is being extended to cover third parties and the government as well as the shareholders of the company.

The negligent performance or failure to perform by a director of enumerated duties is also actionable, usually at the civil court level, rather than criminal.

As to directors being criminally responsible for their acts or omissions, some years ago, in 1993, my law firm put together for the presidents of the Foreign Chambers of Commerce for submission to the then Prime Minister and at his request, a list of 51 special laws, generally regulatory in nature, which contain criminal penalties imposed on directors, and others defined in each law, for acts and omissions of themselves and of their subordinate staff--the legal term for the latter is "vicarious criminal liability". That list, in the form of an extract from our law firm’s book entitled "Thailand Business Basics", is enclosed with this paper as Attachment II. I must stress that the list appearing in the Attachment II list is not complete. There are bound to be some laws we overlooked. In the time since we assembled this list, new laws and amendments to existing laws have been added to the statute books expanding the scope of both civil and criminal liabilities of corporate directors and managers.

The more new regulatory and special laws Thailand adopts to bring Thai corporate practices in line with those of its neighbors and trading partners, the more openness and accountability is being expected of company directors and senior members of their staffs. The Public Companies Act of 1992 is an example. This law added a host of responsibilities and liabilities on directors and representatives of public companies, considerably exceeding those imposed on directors of private limited companies under the Civil and Commercial Code and the Act on Offenses Concerning Registered Partnerships, Limited Partnerships, Limited Companies, Associations and Foundations B.E. 2449 (A.D. 1952), amended last in B.E. 2535 (A.D. 1992).

The laws creating the Securities Exchange Commission, the Stock Exchange of Thailand and the Rules issued by these units add even more requirements and civil and criminal liabilities on public companies listed on the Stock Exchange and their directors and representatives.

The Stock Exchange of Thailand in December 1997 published a 120-page summary of "The Roles, Duties and Responsibilities of Directors of Listed Companies". It is comprehensive, clear and excellently written. I highly recommend it to all company directors, officers, and shareholders, whether or not the company under focus is listed or not, public or private.

"Transparency" and "accountability" are the new buzz words of the 1997 Constitution and the Chuan government. Those concepts are now being applied to corporate governance as well as the public sector.

There is today, without question, rapidly rising accountability and civil and criminal liability exposure of directors and officers of companies.

B. Understanding Directors' And Officers' Insurance

Insurance is a form of protection to keep an insured financially whole in the event of a loss from a risk covered by an insurer and stated in the insurance policy issued by the insurer in exchange for a fee called a "premium". Out of that simple non-legal definition has grown a vast service industry covering commercial and many other risks and providing consulting and financial services.

In Thailand, all insurance business is governed by two principal laws: (1) The Life Insurance Act, and (2) The Casualty Insurance Act. Directors’ and officers' liability insurance falls into the latter class.

The purpose of D&O insurance is to protect the individual directors and other insureds against legal liability claims, judgments and costs arising from breach of contract, trust or duty; any act; neglect; error or omission; any misstatement or misleading statement, and breach of warranty of authority. The policy may or may not protect the company as well as the individuals. Because some companies have the power in their charter, they may agree to indemnify and hold harmless directors and officers from claims. To protect itself, the company might acquire a separate type of insurance policy called a Company Reimbursement Policy. Sometimes, the risks insured under this type of policy are incorporated into a broader D&O policy. Practices obviously vary.

Perhaps more important to understand than what risks are protected by D&O insurance is to thoroughly understand what risks are not covered, i.e. the exclusions, and conditions. For instance, few policies will cover fraud, dishonesty, fines, penalties, deliberate criminal acts, etc.

C. Why Directors' And Officers' Insurance Is Vital

D&O insurance took root in the U.S. earlier than anywhere else. This was essentially because Americans are the most litigious of any nationality on the planet. They love to sue to protect their rights and recover damages for their breach. Those awards can sometimes be very high. Many other common law countries, i.e. those with a British heritage, such as the U.K., Canada, Australia and New Zealand, soon followed the U.S. practices. Thailand, hasn’t yet.

The U.S. also has "class actions" whereby a few people damaged by the acts or omissions of a company can sue the company, its directors and representatives on behalf of themselves and other members of the class who were similarly injured. Thailand does not yet embrace the "class action" concept.

The U.S. also adopted the legal concept of "piercing the corporate veil" to break through the protective walls of limited liability of shareholders for operating companies which are just fronts or shells hiding the real activities of the company which are usually undercapitalized and for the pecuniary benefit of the company’s owners, directors or officers at the expense of staff, third parties or the government. Thailand has not yet adopted this legal weapon either.

There are few laws in Thailand which are designed to aid and clear the way for injured persons to recover damages from directors and representatives of a company.

The absence of these legal arsenals is part of the reason there are few directors and officers liability cases in Thailand. Traditionally, Thais prefer to avoid going to court, rather settling their disputes in other ways.

With the risk of claims and directors being sued in Thailand being so low, in the past only a very few companies and directors bought D&O insurance coverage. For that matter no D&O policy is yet written in Thailand, though Thai insurance companies will ask their counterparts abroad to prepare such a policy in the local insurance company’s name. The local insurance company will service the policy and the insured, probably keep a piece of the risk, and sell the rest on the reinsurance market, locally and abroad.

As companies only act by and through their representatives, a director’s personal liability is usually unlimited. All his or her assets are at risk. While the company can hide behind the protection of limited liability, the director cannot hide. The director’s exposure increases while serving in publicly listed companies, in companies or their subsidiaries having outside shareholders, in joint ventures, when funding is raised from the public and even from private offerings with placement to outside investors, in mergers and acquisitions, major restructuring and sales of assets and subsidiaries.

The importance of D&O insurance to the directors and representatives depends on the value to themselves which they place on the defined and covered risks. Since civil suits and substantial recoveries in Thailand against directors and managers are still rare, the risk could be considered low. Most multinational companies, because of their exposure to suits brought in other countries for events occurring in Thailand, will often carry blanket policies issued overseas to cover all their subsidiaries and the directors and officers thereof.

Today’s trend is towards insistence on more responsible corporate governance. Media disclosures of poor corporate decisions and management, aside from the corporate frauds and scandals, are surfacing on almost a daily basis. Therefore, I believe we can look forward to much closer scrutiny of the actions of company directors and managers by the government, shareholders, current and ex-staff, customers, suppliers, auditors, receivers, and other third parties injured by the acts and omissions of directors and managers. Hence, the demand for D&O insurance protection in civil actions will probably increase.

Suits against directors and officers of companies in, say, the U.S. or U.K., the costs, legal fees and claims paid are averaging US$ 8,000,000 for cases settled out of court, and US$20,000,000 for cases litigated in court. At such levels, the average unprotected director or officer could face personal bankruptcy.

D. Coverage Provided Under Directors' And Officers' Insurance

This topic has been covered in the discussions above. Essentially, D&O insurance protects the insured people from legal liability arising from a variety of civil wrongful acts, errors and omissions in the course of carrying out their duties performed in the name of or on behalf of the companies they serve. If the company indemnifies the individual, that portion paid by the Company is not insured under a D&O policy, i.e. no "double dip" or double recovery.

The exclusions from coverage are numerous. For example, the following are not acts which D&O insurance will cover:

  • dishonest or fraudulent act or omission,
  • wrongful remuneration or profiting from abusing duties,
  • maybe, the death or bodily injury to any person,
  • loss or damage to both immovable or movable property,
  • nuclear, toxic, explosive or hazardous waste caused damages,
  • violations of environmental laws,
  • unauthorized guarantees,
  • risks which are unquantifiable, such as Y2K liabilities.

In any event, coverage will be limited to a maximum insured amount. Coverage will be provided only if the act or omission occurred during the validity period of the policy. The insured must abide by all of the conditions of the policy or protection could be denied.

Not only limited companies and their directors and officers could benefit from D&O insurance. Without D&O coverage, the leaders and office holders of non-profit and charitable organizations, NGOs, unincorporated clubs or societies, foundations and associations are equally unprotected against claims.

Historically, the risks of civil suits in Thailand against directors and representatives are low. And when suits are successful, the court-awarded damages are usually low. Thus, the costs of coverage could exceed the value of the risks being covered. But things could change in the future. Today, there is a choice to be made considering all the factors touched on in this presentation, as well as others I’ve missed.

Your attention has been appreciated. I’ll now respond to your questions.

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.