Economic Observer Network reporter Jiang Xin“Civil Case of Kangmei Pharmaceutical’s Misrepresentation”After the verdict was announced, along with the increase of independent directors’ resignations, the directors and supervisors’ liability insurance (hereinafter referred to as the “directors’ liability insurance”) began to become popular.
On the evening of November 25, listed companies including Xinghui (300464.SZ) and Mingpu Optomagnetics (002902.SZ) disclosed the news of purchasing directors, supervisors, and senior liability insurance.
The Economic Observer reporter learned from a large insurance company that after the Kangmei case was pronounced, the directors and liability insurance did usher in a wave of consulting peaks. The source of demand mainly came from the executive groups of listed companies, including independent directors, secretaries of the board of directors, and The demand for evidence generation is particularly prominent.
According to incomplete statistics, from January to October in 2020 and 2021, more than 170 and 180 A-share listed companies announced their plans for new procurement of directors’ liability insurance.
Qu Wanru, head of Marsh’s China Financial and Professional Liability Risk Department, said in an interview with a reporter from Economic Observer that this year, as the demand for Dong Liability insurance has grown, the Dong Liability insurance rate has increased significantly.
“On November 24, 2021, the company held the 17th meeting of the 4th Board of Directors and the 15th meeting of the 4th Board of Supervisors. The system promotes the full performance of duties by the company’s directors, supervisors and senior managers, and protects the interests of investors. The company plans to purchase liability insurance for the company and its directors, supervisors and senior managers.” On November 25, Xingwei shares announced that the board of directors The resolution on the company’s purchase of directors’ liability insurance was reviewed and approved.
According to the announcement, the company intends to purchase directors and supervisors’ liability insurance for the company and its directors, supervisors and senior executives with an insured amount of not more than RMB 500,000. The insured amount shall be any compensation request and all compensation claims shall not exceed 50 million yuan/ The insurance period is one year.
A reporter from the Economic Observation Network found that Xingwei is not the only listed company that plans to purchase directors’ liability insurance recently. Companies such as Mingpu Optomagnetics, Haozhi Electromechanical, and Xingyuan Materials also announced in November that they intend to purchase directors’ and supervisors’ liability insurance.
According to incomplete statistics, from January to October in 2020 and 2021, more than 170 and 180 A-share listed companies announced their plans for new procurement of directors’ liability insurance.
The relevant person in charge of Ping An Property & Casualty said that in the past two years, relying on the implementation of the new “Securities Law” and the emergence of the Ruixing Coffee case, the coverage of directors and liability insurance in A-share listed companies has shown a clear and rapid upward trend, and the number of consultations has also continued Maintain a high position. From 2020 to October 2021, more than 300 newly insured listed companies have been added, and the overall insurance coverage rate has increased by more than 50%. After the completion of the first instance of Kangmei Pharmaceuticals, Dong Liability Insurance ushered in a small peak again. Since November 15, 2021, within 5 working days, our company has received formal procurement consultations from more than 50 listed companies.
In this context, the premiums of directors, supervisors, and high liability insurance have also shown an upward trend.
Qu Wanru told a reporter from Economic Observation Network that this year, as the demand for Dong Liability insurance has grown, the Dong Liability insurance rate has increased significantly. According to Marsh Global Insurance Market Report, the price of China’s financial and professional liability insurance rose by 17% in the third quarter of this year.
This statement was also confirmed by a practitioner from another property insurance company, who said that from the perspective of an insurance company, the Kangmei case, as the first special representative lawsuit under the new securities law, has greatly shocked the market. However, with the implementation of the new “Securities Law”, in the past year, the rate of A-share directors and liabilities insurance has increased significantly compared with previous years, and some projects have shown signs of doubling their fees. In fact, simply judging from the two data that the insurance premium of the whole market in 2020 is only 100 million yuan, but about 570 listed companies have insured, it can be clearly seen that the insurance premium rate in the past is seriously low. Therefore, listed companies can expect that the insurance premiums of directors and liabilities insurance will increase significantly in the future until the premiums can reach a more reasonable level.
On November 12, the first-instance judgment of “Kangmei Pharmaceutical False Statement Civil Litigation” was announced. A total of 52,037 investors were finally awarded a compensation of 2.459 billion yuan. The compensation involved 19 listed company executives, directors, supervisors, accounting firms, and related companies. The personnel shall bear joint and several liability ranging from 5% to 100%. This is the first practice of the special representative litigation system (ie, the “Class Action System with Chinese Characteristics”) after the new “Securities Law” is formally implemented. The landing of this case also marks that the new “Securities Law” officially implemented on March 1, 2020 has truly gone from paper to practice, and has improved the interconnection and mutual support of administrative law enforcement, criminal accountability, and civil recovery. Dimension system.
In the Kangmei case, the 13 signed directors, supervisors, and senior executives each assumed joint and several liability within the range of 5-20%. This included the company’s five former independent directors-Jiang Zhenping, Li Ding’an, and Zhang Hong, who signed the 2016 and 2017 annual reports of Income Pharmaceuticals and the 2018 semi-annual reports, and were sentenced to bear 10% of the joint liability for compensation. Guo Chonghui and Zhang Ping were sentenced to bear 5% joint and several liability for signing only in the 2018 semi-annual report of Kangmei Pharmaceutical. Calculated on this basis, independent directors’ joint and several compensation liabilities ranged from as little as 123 million yuan to as much as 246 million yuan.
The joint and several liability of independent directors has caused many independent directors to call out that the powers and responsibilities are not equal, and because of this, many listed companies announced that they have received the resignation of independent directors. Statistics show that after the first-instance judgment in the Kangmei case, more than 30 companies have received the resignation of independent directors. A listed company’s secretary of the board told the Economic Observer Network that although Kangmei Pharmaceuticals had set aside 500 million yuan (1 billion yuan in total) as compensation for civil litigation in 2019 and 2020 respectively, based on the above circumstances, Kangmei Pharmaceuticals itself The solvency of the company has been problematic. If the relevant defendant fails to successfully appeal, and the company’s subsequent reorganization is not progressing smoothly, it may be enforced.
An independent director practitioner who plans to resign even said, “There is indeed a risk. Maybe the independent director professor who was still talking and laughing yesterday will become an “old man” who cannot travel freely tomorrow.”
Liability for compensation is not within the scope of the director’s liability insurance
Directors’ liability insurance refers to a type of professional liability insurance that insurance companies provide financial compensation to directors, supervisors and senior managers (hereinafter referred to as “directors, supervisors”) who are held accountable for their personal actions due to negligence or negligence. The company’s operations will always face various risks. As the actual executor of the company’s operations and management, directors, supervisors, and senior executives will inevitably lead to losses to the company and shareholders due to decision errors or misjudgment of the market situation, and thus bear the liability for compensation.
Although the Kangmei case has triggered many insurance plans for directors, supervisors, and senior directors of listed companies, it does not mean that the directors, supervisors, and senior liability insurance will protect the sky-high compensation in the Kangmei case.
And this is precisely the doubts of the directors, supervisors, and senior executives who are planning to purchase insurance. The person in charge of the above-mentioned large property insurance stated that in the recent consultations on Dong Liability Insurance, policyholders are more concerned about “the content of the specific protection of Dong Li “Underwriting”, “If the directors’ liability insurance is insured, who can be covered by insurance”, “Does the director’s liability insurance need to be insured by name”, “if an insurance accident occurs, whether there is a priority for compensation, how to determine the proportion of compensation for each executive” and so on.
Qu Wanru said that although the director’s liability insurance is a liability insurance, the policies have tailor-made features, and some listed companies are still not clear enough about the coverage and exclusions of the insurance policies, which will bury hidden dangers in later disputes and require further steps. Clarifying the responsibilities of the insurance policy of the directors and responsibilities can also better facilitate communication and negotiation between the two parties during the process of insurance claims.
For example, the actual controller of the “first evil” in the Kangmei case is not covered by the protection. A property insurance practitioner told the Economic Observer that the director’s liability insurance generally underwrites listed companies and their directors and supervisors, and the actual controller is Shareholders of listed companies are not within the scope of standard protection.
The above-mentioned people said that for the application of specific protections for directors, supervisors, and senior executives, there is a core clause in the market standard insurance clauses for directors and liabilities, called “severability clauses”, which are mainly used to judge the applicability of deliberate violations. The standard director’s liability insurance clause shall exclude those who know and participate in deliberate fraud.
Article 4 of the Insurance Law also stipulates that insurance activities must abide by laws and administrative regulations, respect social ethics, and must not harm public interests. At the same time, according to the “Measures for the Supervision of Liability Insurance Business” issued by the China Banking and Insurance Regulatory Commission in December 2020, it is also stated that insurance companies shall not use liability insurance to cover the insured’s liability for compensation caused by accidents intentionally created.
For those who are unaware or not involved in the fraud, Dong Liability Insurance shall treat them as separate individuals and treat them differently from those who participated in the fraud, and continue to provide insurance protection for the losses that the insured who is unaware or not participating in the fraud shall bear in accordance with the law.
The severability clauses in the insurance clauses of directors’ liability insurance should also be judged based on the supervisory penalty decision, the court’s civil or criminal judgment, or the insured’s self-confidence.
Insured amount and insurance rate are both low
According to publicly disclosed information, more than 50% of listed companies that have purchased D&O insurance have a maximum coverage of RMB 50 million or less. The relevant person in charge of Ping An Property & Casualty said that after the implementation of the new “Securities Law”, 70% of the listed companies purchasing new directors and liability insurance in 2020 have increased their coverage to 50 million to 100 million yuan.
Compared with the compensation amount in the Kangmei case, the current amount of protection is seriously inadequate. The above-mentioned property and casualty insurance practitioners said that the amount of protection insured by A-share listed companies will continue to rise in the future.
Statistics show that more than 650 of the 4,300 A-share listed companies across the country have insured directors and liability insurance, with an insurance coverage rate of only 15.1%.
The above-mentioned property and casualty insurance practitioners said that many directors, supervisors and senior directors of listed companies believe that the company is operating decently and there is no possibility of problems. However, this is not the case. According to the Blue Book on the Implementation of the Corporate Internal Control Standard System by Listed Companies in 2019 (hereinafter referred to as the Blue Book), the proportion of listed companies that disclose major internal control defects has shown an overall upward trend, reaching the highest value of 3.82% in 2019. The proportion of listed companies that disclosed important internal control defects fluctuated around 2%.
“There is also the mentality of company directors, supervisors and senior executives: insurance will refuse to pay for fraud, and there is no need to take responsibility if you do not make a mistake.” Being investigated and punished by supervision and responsible for compensation, and financial fraud itself is a risk that commercial insurance cannot cover, so even if the director’s liability insurance is purchased, actual compensation cannot be obtained. In fact, many of the A-share letter disclosure issues do not involve actual financial fraud. At the same time, the insurance market standard directors’ liability insurance clauses are designed to truthfully inform and “segment” illegal acts. There will be no compensation for the relevant subjects of the fraud, but the unknowing and non-participants can continue to obtain relevant protection in accordance with the insurance contract.
In past civil lawsuits, independent directors often ignored civil compensation due to the relatively low amount of compensation. Instead, their main concern was whether the administrative fines would be insured by the insurance company. After the Kangmei case, this view is about to change. In the Kangmei Pharmaceuticals case, although the independent directors all cited “unable to discover false statements, diligence, ignorance, no motivation, no causal relationship between regulatory penalties and investor losses” as their defenses, the court ultimately relied on “although not Participated in fraud, but did not perform diligently, committed major negligence, and has signed, should bear the responsibility” to judge.
The person in charge of the aforementioned large-scale property insurance said that with the completion of the Kangmei Pharmaceutical case, the Securities Regulatory Commission is expected to promote the improvement of the representative litigation system based on the comprehensive summary of the experience of the first case, and promote the normalization of special representative litigation in accordance with the law. Faced with potentially billions of indemnities, independent directors can no longer judge future risks in the way they thought in the past, and must consider whether to require listed companies to insure them before agreeing to the appointment of independent directors of listed companies.
It is worth noting that on November 25, the China Securities Regulatory Commission revised the relevant supervision measures for independent directors and issued independent director rules for listed companies to solicit opinions from the public. The draft opinion clearly stated that listed companies can establish necessary independent directors. Liability insurance system to reduce the risks that may be caused by independent directors’ normal performance of duties.
However, there seems to be no insurance product that only covers one director in the domestic market. Qu Wanru stated that independent directors are all insured individuals in the insurance policy under the responsibility of the directors, which is no different from ordinary directors. As long as the general company purchases sufficient insurance coverage, independent directors can enjoy the same protection as directors and senior management. There is no need to design a separate insurance policy, unless the company does not purchase insurance for the directors and senior management.
Director Liability Insurance for 20 Years
On January 7, 2002, the China Securities Regulatory Commission and the Economic and Trade Commission jointly issued the “Guidelines for the Governance of Listed Companies”, Article 39 of which stipulated that “listed companies may purchase liability insurance for their directors with the approval of the general meeting of shareholders. However, the directors violated laws and regulations. And the company’s articles of association, except for liabilities caused by the provisions of the company’s articles of association,” and thus the director’s liability insurance formally obtained legal status in my country.
On January 15 of the same year, after the Supreme People’s Court issued the “Notice on Acceptance of Civil Tort Dispute Cases Caused by False Statements in the Securities Market”, the civil compensation liabilities of listed companies’ directors, supervisors, and senior executives were clarified. Realistic needs in the true sense. On January 23, Ping An Insurance and Chubb Insurance Group of the United States launched my country’s first director’s liability insurance. Vanke Chairman Wang Shi and other directors and supervisors became its insured, which opened the prelude to my country’s director and liability insurance. So far, it has been nearly 20 years.
In addition to the implementation of the new “Securities Law” and the subsequent Kangmei trial, what caused the executives of listed companies to pay attention to the responsibilities of directors and supervisors, there is also the Ruixing Coffee fraud incident.
In April 2020, Ruixing Coffee “exposed” the company’s forged financial data, involving 2.2 billion yuan in sales from the second quarter to the fourth quarter of 2019. At that time, many law firms in the United States, including GPM, Gross, and Faruqi, announced that they had filed a class action lawsuit against Ruixing Coffee Company and certain managers for securities fraud.
On the evening of September 21 this year, Luckin Coffee issued an announcement stating that the company signed a letter of intent for a settlement of US$187.5 million (equivalent to approximately RMB 1.214 billion) with the representative of the plaintiff in the US class action lawsuit. Just before that, on September 22, 2020, the State Administration for Market Regulation made an administrative penalty decision of 61 million yuan on Ruixing Coffee; in December 2020, Ruixing Coffee had made a US$180 million accounting fraud accusation against the United States. When the Securities and Exchange Commission reached a settlement. Because of 2.2 billion yuan of fraud, Ruixing Coffee paid a total of 2.5 billion yuan in “price”.
It is worth noting that at that time, Luckin Coffee was reported to have purchased Dong Liability Insurance. It is understood that the “Co-insurance” composed of Luckin Coffee Dong Liability Insurance Policy has a total of 4 layers, with a total insured amount of US$25 million ( (Equivalent to nearly 200 million yuan), the underwriters include Ping An Property Insurance, China Pacific Insurance Property Insurance, PICC Property Insurance, China United Property Insurance, Guoren Property Insurance, China Land Insurance, Jintai Property Insurance, Qianhai Property Insurance and other companies. However, the relevant insurance company did not disclose how the compensation will be paid in the end.Return to Sohu to see more
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