CHAPTER NO.

INTRODUCTION TO INSURANCE
Every risk involves the loss of one or other kind. In older time, the contribution by the person was
made at the time of loss. Today, only one business, which offers all walks of life, is insurance
business. Owing to growing complexity of life, trade and commerce, individual and business firms
and turning to insurance to manage various risks. Every individual in this world is subject to
unforeseen uncertainties which may make him and his family vulnerable. At this place, only
insurance helps him not only to survive but also recover his loss and continue his life in a normal
manner.

Insurance is an important aid to commerce and industry. Every business enterprise involves large
number of risks and uncertainties. It may involve risk to premises, plant and machinery, raw
material and other things. Goods may be damaged or may be destroyed due to fire or flood. Some
risk can be avoided by timely precautions and some are unavoidable and are beyond the control of a
business. These unavoidable risks can be protected by insurance.

What is Insurance
In D.S. Hamsell words, insurance is defined “as a social device providing financial compensation
for the effects of misfortune, the payment being made from the accumulated contributions of all
parties participating in the scheme”

In simple terms “Insurance is a co-operative device to spread the loss caused by a particular risk
over a number of persons, who are exposed to it and who agree to insure themselves against the
risk”

Thus, the insurance is

(a) A cooperative device to spread the risk;

(b) the system to spread the risk over a number of persons who are insured against the risk;

(c) the principle to share the loss of the each member of the society on the basis of probability of
loss to their risk; and
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 (d) the method to provide security against losses to the insured

Insurance may be defined as form of contract between two parties (namely insurer and insured or
assured) whereby one party (insurer) undertakes in exchange for a fixed amount of money
(premium) to pay the other party (Insured), a fixed amount of money on the happening of certain
event (death or attaining a certain age in case of life) or to pay the amount of actual loss when it
takes place through the risk insured (in case of property)

TYPE OF INSURANCE
Insurance cover various types of risks and include various insurance policies which provide
protection against various losses.

1. Life insurance;

2. General Insurance;

1. Life Insurance: The life insurance contract provide elements of protection and
investment after getting insurance, the policyholder feels a sense of protection because he
shall be paid a definite sum at the death or maturity. Since a definite sum must be paid, the
element of investment is also present. In other words, life insurance provides against pre-
mature death and a fixed sum at the maturity of policy. At present, life insurance enjoys
maximum scope because each and every person requires the insurance.

Life insurance is a contract under which one person, in consideration of a premium paid
either in lump sum or by monthly, quarterly, half yearly or yearly installments, undertakes to
pay to the person (for whose benefits the insurance is made), a certain sum of money either
on the death of the insured person or on the expiry of a specified period of time.

Life insurance offers various polices according to the requirement of the persons -

- Term Assurance

- Whole Life

- Endowment Assurance

- Family Income Policy

- Life Annuity Joint Life Assurance

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 - Pension Plans

- Unit Linked Plans

- Policy for maintenance of handicapped dependent

- Endowment Policies with Health Insurance benefits

2. General Insurance: The general insurance includes property insurance, liability

insurance and other form of insurance. Property insurance includes fire and marine
insurance. Property of the individual and business involves various risks like fire, theft etc.
This need insurance Liability insurance includes motor, theft, fidelity and machine insurance

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 CHAPTER NO.2

INTRODUTION TO LIABILITY INSURANCE

MEANING

Liability insurance is a part of the general insurance system of risk financing to protect the
purchaser (the "insured") from the risks of liabilities imposed by lawsuits and similar claims. It
protects the insured in the event he or she is sued for claims that come within the coverage of
the insurance policy. Originally, individual companies that faced a common peril, formed a group
and created a self-help fund out of which to pay compensation should any member incur loss (in
other words, a mutual insurance arrangement). The modern system relies on dedicated carriers,
usually for-profit, to offer protection against specified perils in consideration of a premium.
Liability insurance is designed to offer specific protection against third party insurance claims, i.e.,
payment is not typically made to the insured, but rather to someone suffering loss who is not a party
to the insurance contract. In general, damage caused intentionally as well as contractual liability are
not covered under liability insurance policies. When a claim is made, the insurance carrier has the
duty (and right) to defend the insured. The legal costs of a defense normally do not affect policy
limits unless the policy expressly states otherwise; this default rule is useful because defense costs
tend to soar when cases go to trial. In many cases, the defense portion of the policy is actually more
valuable than the insurance, as in complicated cases, the cost of defending the case might be more
than the amount being claimed, especially in so-called "nuisance" cases where there is no liability
but the case has to be defended anyway.

Insurer duties

Liability insurers have one, two or three major duties, depending upon the jurisdiction:

1. the duty to defend,

2. the duty to indemnify, and
3. the duty to settle a reasonably clear claim.

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TO defend

duty to defend is prevalent in the United States and Canada, where most liability insurance
policies provide that the insurer "has the right and duty" to defend the insured against all "suits"
to which the policies apply. It is usually triggered when the insured is sued (or in some
instances, given pre-suit notice that they are about to be sued) and subsequently "tenders"
defense of the claim to its liability insurer. Usually this is done by sending a copy of
the complaint along with a cover letter referencing the relevant insurance policy or policies and
demanding an immediate defense.

In most U.S. states and Canada, the insurer generally has four main options at this point, to:

1. defend the insured unconditionally;

2. defend the insured under a reservation of rights;
3. seek a declaratory judgment that it has no duty to defend the claim; or
4. decline to defend or to seek a declaratory judgment.

The duty to defend is generally broader than the duty to indemnify, because most (but not all)
policies that provide for such a duty also specifically promise to defend against claims that are
groundless, false, or fraudulent. Therefore, the duty to defend is normally triggered by a potential
for coverage. The test for a potential for coverage is whether the complaint adequately pleads at
least one claim or cause of action which would be covered under the terms of the policy if the
plaintiff were to prevail on that claim at trial, and also does not plead any allegations which would
entirely vitiate an essential element of coverage or trigger a complete exclusion to coverage. It is
irrelevant whether the plaintiff will prevail or actually prevails on the claim; rather, the test is
whether the claim if proven would be covered. Vague or ambiguous allegations broad enough to
encompass a range of possibilities both within and without coverage are usually construed in favor
of a potential for coverage, but speculation about unpled allegations (that is, matters on which the
complaint is totally silent) is insufficient to create a potential for coverage. Some jurisdictions allow
extrinsic evidence to be considered, either because it is expressly described in the complaint or it is
relevant to the facts expressly alleged in the complaint.

If there is a duty to defend, it means the insurer must defend the insured against the entire lawsuit
even if most of the claims or causes of action in the complaint are clearly not covered. An insurer
can choose to defend unconditionally without reserving any rights, but by doing so, it waives (or is
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later estopped from asserting) the absence of coverage as a defense to the duty to defend and
impliedly commits to defending the insured to a final judgment or a settlement regardless of how
long it takes (unless the policy expressly provides that defense costs reduce policy limits). In the
alternative, the insurer may defend under a reservation of rights: it sends a letter to the insured
reserving its rights to immediately withdraw from the insured's defense if it becomes clear there is
no coverage or no potential for coverage for the entire complaint, and to recover from the insured
any funds expended to that point on defending against any particular claims or causes of action
which were never covered or even potentially covered to begin with.

If the insurer chooses to defend, it may either defend the claim with its own in-house lawyers
(where allowed), or give the claim to an outside law firm on a "panel" of preferred firms which have
negotiated a standard fee schedule with the insurer in exchange for a regular flow of work. The
decision to defend under a reservation of rights must be undertaken with extreme caution in
jurisdictions where the insured has a right to independent counsel, also known as Cumis counsel.

To indemnify
The duty to indemnify is the insurer's duty to pay all covered sums for which the insured is held
liable, up to the limits of coverage and subject to any deductibles, retained limits, self-insured
retentions, excess payments, or any other amounts of money which the insured is required to pay
out-of-pocket as a precondition to the insurer's duty.[4]

It is generally triggered when a final judgment is entered against the insured, and it is satisfied when
the insurer pays such covered amounts to the plaintiff who obtained the judgment. Most policies
provide for payment of monetary damages as well as any costs, expenses, and attorney's fees which
the plaintiff may also be entitled to as the prevailing party.

Unlike the duty to defend, the duty to indemnify extends only to those claims or causes of action in
the plaintiff's complaint which are actually covered under the policy, since a final judgment against
the insured would normally be supported by a factual record in the trial court showing exactly why
the plaintiff prevailed (or failed to prevail) on each claim or cause of action. Thus, an insurer could
have a duty to defend based on mere allegations that show a potential for coverage, but may not
have a duty to indemnify if the evidence supporting a final judgment against the insured also takes
those claims or causes of action completely outside of the policy's scope of coverage.

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To settle reasonable claims

In some jurisdictions, there is a third duty, the duty to settle a reasonably clear claim against the
insured. This duty is generally triggered only if a reasonable opportunity to settle actually arises,
either because the plaintiff makes a settlement offer, or the insurer is aware of information to the
effect that the plaintiff would accept a settlement offer. The insurer is neither required to initiate an
offer to a plaintiff likely to refuse it, nor required to accept an outrageous offer from a plaintiff who
filed a frivolous lawsuit and cannot prevail against the insured under any theory.

The duty to settle is of greatest import in the scenario where the insured may have some liability
exposure (i.e., there is some evidence apparently linking the insured to the plaintiff's alleged
injuries), the plaintiff has evidence of substantial damages which may exceed policy limits, and the
plaintiff makes a settlement demand (either to the insured or directly to a defending insurer) which
equals or exceeds policy limits. In that situation, the insurer's interests conflict with the insured's
interests, because the insurer has an incentive to not immediately settle. That is, if the insurer
refuses to settle and the case then goes to trial, there are only two possible outcomes: (1) the insured
loses and the insurer must pay the ensuing judgment against the insured up to the policy limits, or
(2) the insured wins, meaning both the insured and the insurer bear no liability. If the first outcome
occurs, then it is essentially "nothing gained nothing lost" from the insurer's point of view, because
either way it will pay out its policy limits. (For simplicity, this analysis disregards sunk costs in the
form of defense costs incurred to that point, as well as additional costs sustained by the insurer in
defending the insured to a verdict at trial, and opportunity costs sustained by the insured while
participating in trial.)

Effects of breach

Occurrence v. claims-made policies

Traditionally, liability insurance was written on an occurrence basis, meaning that the insurer agreed
to defend and indemnify against any loss which allegedly "occurred" as a result of an act or
omission of the insured during the policy period. This was originally not a problem because it was
thought that insured’s' tort liability was predictably limited by doctrines like proximate
cause and statutes of limitations. In other words, it was thought that no sane plaintiffs' lawyer would
sue in 1978 for a tortious act that allegedly occurred in 1953, because the risk of dismissal was so
obvious.

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In the 1970s and 1980s, a large number of major toxic tort (primarily
involving asbestos and diethylstilbestrol) and environmental liabilities resulted in numerous judicial
decisions and statutes that radically extended the so-called "long tail" of potential liability chasing
occurrence policies. The result was that insurers who had long-ago closed their books on policies
written 20, 30, or 40 years earlier now found that their insureds were being hit with hundreds of
thousands of lawsuits that potentially implicated those old policies. A body of law has developed
concerning which policies must respond to these continuous injury or "long tail" claims, with many
courts holding multiple policies may be implicated by the application of an exposure, continuous
injury, or injury-in-fact trigger and others holding the policy in effect at the time the injuries or
damages are discovered are implicated.The insurance industry reacted in two ways to these
developments. First, premiums on new occurrence policies skyrocketed, since the industry had
learned the hard way to assume the worst as to those policies. Second, the industry began issuing
claims-made policies, where the policy covers only those claims that are first "made" against the
insured during the policy period. A related variation is the claims-made-and-reported policy, under
which the policy covers only those claims that are first made against the insured and reported by the
insured to the insurer during the policy period. (There is usually a 30-day grace period for reporting
after the end of the policy period to protect insureds who are sued at the very end of the policy
period.)

Claims-made policies enable insurers to again sharply limit their own long-term liability on each
policy and in turn, to close their books on policies and record a profit. Hence, they are much more
affordable than occurrence policies and are very popular for that reason. Of course, claims-made
policies shift the burden to insured to immediately report new claims to insurers. They also force
insured to become more proactive about risk management and finding ways to control their own
long-tail liability.

Claims-made policies often include strict clauses that require insured to report even potential claims
and that combine an entire series of related acts into a single claim. This puts insured to a Sophie's
choice. They can timely report every "potential" claim (i.e., every slip-and-fall on their premises),
even if those never ripen into actual lawsuits, and thereby protect their right to coverage, but at the
expense of making themselves look more risky and driving up their own insurance premiums. Or
they can wait until they actually get sued, but then they run the risk that the claim will be denied
because it should have been reported back when the underlying accident first occurred.

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Claims-made coverage also makes it harder for insured to switch insurers, as well as to wind up and
shut down their operations. It is possible to purchase "tail coverage" for such situations, but only at
premiums much higher than for conventional claims-made policies, since the insurer is being asked
to re-assume the kind of liabilities which claims-made policies were supposed to push to insured to
begin with.

Not surprisingly, insuredsrecognised what the insurance industry was up to in trying to use claims-
made policies to push a substantial amount of risk back to insured, and claims-made coverage was
the subject of extensive litigation in several countries throughout the 1970s, 1980s, and 1990s. This
led to important decisions of the U.S. Supreme Court in 1978 and 1993 and of the Supreme Court of
Canada in 1993.

Retained limits and SIRs

One way for businesses to cut down their liability insurance premiums is to negotiate a policy with a
retained limit or self-insured retention (SIR), which is somewhat like a deductible. With such
policies, the insured is essentially agreeing to self-insure and self-defend for smaller claims, and to
tender only for liability claims that exceed a certain value. However, writing such insurance is itself
risky for insurers. The California Courts of Appeal have held that primary insurers on policies with
a SIR must still provide an "immediate, 'first dollar' defense" (subject, of course, to their right to
later recover the SIR amount from the insured) unless the policy expressly imposes exhaustion of
the SIR as a precondition to the duty to defend.In many countries, liability insurance is a
compulsory form of insurance for those at risk of being sued by third parties for negligence. The
most usual classes of mandatory policy cover the drivers of vehicles, those who offer professional
services to the public, those who manufacture products that may be harmful, constructors and those
who offer employment. The reason for such laws is that the classes of insured are deliberately
engaging in activities that put others at risk of injury or loss. Public policy therefore requires that
such individuals should carry insurance so that, if their activities do cause loss or damage to another,
money will be available to pay compensation. In addition, there are a further range of perils that
people insure against and, consequently, the number and range of liability policies has increased in
line with the rise of contingency fee litigation offered by lawyers (sometimes on a class
action basis). Such policies fall into three main classes:

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Insurable risks

Generally, liability insurance covers only the risk of being sued for negligence or strict
liability torts, but not any tort or crime with a higher level of mensrea. This is usually mandated by
the policy language itself or case law or statutes in the jurisdiction where the insured resides or does
business.

In other words, liability insurance does not protect against liability resulting from crimes or
intentional torts committed by the insured. This is intended to prevent criminals,
particularly organized, from obtaining liability insurance to cover the costs of defending themselves
in criminal actions brought by the state or civil actions brought by their victims. A contrary rule
would encourage the commission of crime, and allow insurance companies to indirectly profit from
it, by allowing criminals to insure themselves from adverse consequences of their own actions.

It should be noted that crime is not uninsurable per se. In contrast to liability insurance, it is possible
to obtain loss insurance to compensate one's losses as the victim of a crim

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CHAPTER NO.3

TYPES OF LIABILITY INSURANCE

A. COMMERCIAL GENRAL LIABILITY INSURANCE

B. GENRAL LIABILITY INSURANCE
C. BUSINESS LIABILITY INSURANCE

A.COMMERCIAL GENRAL LIABILITY INSURANCE

If someone falls while visiting your business premises or a customer is hurt by a product your
business sells, you can be held responsible. That’s the risk that liability insurance covers. Liability
insurance, also called Commercial General Liability (CGL), covers four categories of events for
which you could be held responsible: bodily injury; damage to others’ property; personal injury,
including slander and libel; and false or misleading advertising. CGL coverage pays for the injured
party’s medical expenses. It excludes your employees, who are covered by workers’ compensation.

There are two types of legal damages people may sue you for that are typically covered by a CGL
policy:

 Compensatory damages: financial losses suffered by the injured party and future losses they
may suffer resulting from an injury they claim in the lawsuit.
 General damages: non-monetary losses suffered by the injured party, such as “pain and
suffering” or “mental anguish.”

Standard liability insurance does not protect a business against:

 Claims from sexual harassment, wrongful termination of employees, failure to employ or

promote, or race and gender lawsuits. These and other employee-related claims are covered
by employment practices liability coverage. The cost of employment practices liability
coverage depends on the number of employees, whether there is a history of the company
having been sued in the past, and other business risk factors. The policy also pays for legal
costs associated with a company’s defense of a lawsuit related to employment practices.

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  Claims related to operating an automobile or truck. If you own vehicles for your business,
whether for deliveries or client consultations, you will need separate commercial automobile
coverage to protect you and your employees against liability claims resulting from car
accidents.
 Automobile liability insurance is required in the District of Columbia. It requires drivers to
have a minimum level of insurance coverage for bodily injury and property damage caused
by the insured’s negligence. Drivers are also required to have a minimum level of uninsured
motorist coverage, which helps you when you are involved in an accident where the other
driver is at-fault and they don't have auto insurance. In the District, “no fault” auto
insurance, also known as personal injury protection (PIP), is optional. It provides coverage
for medical, rehabilitation, funeral and lost wages to the insured and their passengers
regardless of who was at fault. If your vehicle is primarily used for business, make sure you
obtain a commercial auto policy.
 Professional Liability insurance — or Errors and Omissions insurance — is coverage for
wrongful practices by professional service providers (e.g. healthcare providers, lawyers and
consultants). This type of insurance covers faulty service (errors) or failure to provide a
service altogether (omission). Malpractice insurance is a specific type of professional
liability policy that protects physicians and other licensed professionals from liability
associated with bodily injury, medical expenses and property damage, as well as the cost of
defending lawsuits related to such claims.

As with other liability insurance policies, premiums for professional liability coverage depend on
the type of professional service provided and its level of risk.

Claims related to workers’ compensation insurance:

 Workers’ compensation insurance protects a business owner from claims by employees who
suffer a work-related injury or illness. Workers’ compensation insurance is required for
companies in the District with one or more employees. Typically, workers’ compensation
covers the employee’s medical expenses, rehabilitation costs and missed wages. Contact the
D.C. Department of Employment Services at (202) 671-1000 with your questions about
specific workers’ compensation requirements in the District.

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  According to the Small Business Administration, business owners, independent contractors,
farm workers and unpaid volunteers are usually exempt from workers’ compensation
eligibility.
 If this is the first time you’re purchasing workers’ compensation insurance, the rate will
depend on your payroll and your industry. After a few years, your premiums may be based
on the actual experience of your company.

 EMPLOYEE LIABILITY INSURANCE

Employers liability coverage protects your firm against suits by employees for injuries sustained on
the job. It is automatically included under Part Two of the standard NCCI workers compensation
policy. Employers liability coverage is important. Without it, your business would have no
protection against third-party lawsuits by injured employees.

Exclusive Remedy

Workers compensation benefits are the exclusive remedy, or sole source of compensation, for most
employees injured on the job.

In most states, you (the employer) must purchase a policy that provides medical and other benefits
to injured workers. In exchange for those benefits, injured workers give up the right to sue you for
damages. That is, employees who accept workers compensation benefits for on-the-job injuries are
prohibited from suing you for those injuries.

Suits Arising from Worker Injuries

While states laws generally bar workers from suing their employer for work-related injuries, the
laws have some exceptions. Lawsuits may be filed by injured workers or their family members
under the following circumstances:

 The injured employee has rejected WC benefits;Some states allow workers to

reject WC benefits and sue you instead. To collect damages, the worker must prove that you
were negligent and that your negligence caused his injury.
 The worker is not covered by your state WC law; Workers compensation laws
typically exclude workers engaged in certain types of employment. For instance, many laws

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 exclude agricultural and domestic workers. If you employ a worker who is not covered by
the law, and he or she is injured on the job, the worker may sue you for damages.

 The worker sustains an injury or illness not covered by the WC law; Non-
occupational injuries and illnesses are not covered by workers compensation laws.
Moreover, some illnesses acquired on the job may not be covered by a state's
occupational disease law. For example, suppose a worker attempts to collect WC benefits for
rheumatoid arthritis he claims he contracted from exposure to chemicals at your workplace.
He is denied WC benefits on the basis that arthritis is not an occupational disease. The
worker then files a lawsuit against you seeking damages for his disease.

 The injured worker sues a third party, who then sues you ; For instance,
suppose you own a plumbing company that has been hired by a general contractor to replace
pipes in a building. Jim, one of your employees, injures his back at the job site. Jim files a
workers compensation claim and collects benefits from your WC insurer. Jim then sues the
general contractor, claiming it failed to maintain a safe workplace. The GC settles the claim
with Jim. It then attempts to recoup the amount it has paid to Jim by suing you for damages.
This type of claim is called a third-party-over suit.
 The injured worker’s spouse sues you for loss of consortium; Suppose that
Jim, in the previous example, sustains nerve damage due to his back injury. The nerve
damage causes impotence. Jim’s wife, Jane, sues you for loss of consortium (marital
relations).
 A family member of the injured worker sues you for consequential
injury; In the previous example, suppose that Jane sues you not only for loss of
consortium, but also for a consequential injury. She claims that stress over Jim’s back injury
has caused her to develop migraine headaches. She demands that you pay for her treatment.

 The injured worker sues you in a capacity other than as an

employer; Suppose your company manufactures hand drying machines like those found in
public restrooms. Jill, one of your employees, is in the restroom at your workplace when she
burns her hand on a drying machine made by your firm. Jill files a WC claim and collects
benefits from your insurer. She also sues you in the capacity as a manufacturer, filing
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 a product liability suit against your firm. Because the suit arose from an injury to an
employee, it is not covered under your general liability policy.

Employers liability insurance covers the types of suits described above. For coverage to apply, you
must be legally liable for the employee’s injury or occupational disease. Also, the injury must arise
out of the worker’s employment and occur during the policy period of your workers' compensation
policy. If the worker has sustained an occupational injury, the injury must be caused or aggravated
by the conditions of your employment. Moreover, the employee's last exposure to the disease-
causing conditions (such as asbestos fibers or silica dust) must occur during the policy period.

Exclusions

Here are some key exclusions that apply to employers liability coverage.

 Liability you assume under a contract; Suppose you lease office space. Under the
rental contract, you assume liability for any damages your landlord is obligated to pay to
your employees for injuries they sustain on the job. An employee of yours is injured on the
job and sues your landlord for negligence. You are obligated under the contract to pay any
damages awarded to the worker. Because of the contractual liability exclusion, your
employer's liability insurance will not cover those damages. However, the claim may be
covered by the contractual liability coverage that is included in your general liability policy.
 Injury to a worker knowingly employed by you or an executive officer in
violation of the law; For example, you have employed a 14-year-old worker, even
though you know the law requires workers to be at least 16. If the worker is injured and sues
you for damages, the claim will not be covered.
 Punitive damages because of injury to an employee employed in violation
of the law; Your policy will not pay any punitive damages assessed against you because
you have employed a worker illegally.
 Intentional injuries; There is no coverage for injuries you have inflicted on an
employee intentionally. For instance, you injure a worker with a baseballbat to punish him

for being late to work. If the worker sues you for the injury, the suit will not be
covered.
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  Psychological injuries ;Your policy won't cover non-physical injuries
like defamation, discrimination, humiliation and wrongful termination.
 Injury to any employee outside the U.S. or Canada; There is no coverage for
employees who are injured outside the U.S. or Canada, except for an American or Canadian
citizen who is temporarily outside these locations (while on a business trip, for instance).
 Injuries to individuals covered under federal laws; Workers covered under U.S.
laws like the Long shore and Harbor Workers Compensation Act, the Defense Base Act, and
the Federal Employers Liability Act are excluded.
 Masters or crew members; No coverage is afforded for injury to any master or crew
member of any vessel. These individuals are covered for workplace injuries under various
maritime laws.

Limits

Unlike workers compensation insurance, employers liability coverage is subject to limits. The limits
are stated in the Information Page (declarations). There are three separate limits:

 Bodily Injury by Accident; This is the most the insurer will pay for all injuries
sustained by all employees injured in a single accident.
 Bodily Injury by Disease - Policy Limit; This is the most the insurer will pay for
occupational disease sustained by all employees during the policy period.
 Bodily Injury by Disease - Each Employee; This is the most the insurer will pay
for occupational disease sustained by any one worker.

Defense Costs

The expenses your insurer incurs to defend you against an employer's liability suit are covered in
addition to the limits. That is, attorneys fees, litigation expenses and other costs attributed to your
defense will not reduce your limits.

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Contractual Liability Coverage for Employee Injuries

Have you signed a contract that makes you liable for claims stemming from injuries to your
employees? Such contracts are common in the business world. As this article will explain, employee
claims for which you are responsible due to your assumption of liability may be covered by your
liability policy. These claims are covered by an exception to an exclusion found under Coverage A,
Bodily Injury and Property Damage Liability.

Employers Liability Exclusion

Suppose that an employee of yours is injured on the job and sues your company for bodily injury.
Will the suit be covered under your general liability policy? The answer is generally no. Coverage A
of the policy contains an exclusion that applies to employee suits. This exclusion is called
the employers liability exclusion. The exclusion applies to two types of suits:

1. Any suit alleging bodily injury to an employee of yours, if the injury occurs in the course of
the workers' employment by you. For instance, Jack, an employee of yours, is injured on the
job. You have purchased a workers compensation policy as required by law. Nevertheless,
Jack rejects workers compensation benefits and sues you for bodily injury.
2. Any suit alleging bodily injury to certain family members of the injured employee as a
consequence of the employee’s injury. For instance, Jack's wife sues you for bodily injury.
She claims that she has developed migraine headaches as a consequence of caring for her
injured husband.

While they are excluded by your liability policy, employee suits are covered under employers
liability coverage. This coverage is included in your workers compensation policy under Part Two.

Exception for Liability Assumed Under a Contract

The employers liability exclusion in your liability policy contains one important exception.The
exclusion does not apply to bodily injury to an employee of yours if you assume liability for that
injury under a contract. For coverage to apply, the contract must qualify as an insured contract, as
that term is defined in your policy. In other words, if you assume liability for employee injuries

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under a contract that meets the definition of an insured contract, you should be covered for any suits
that arise out of those injuries. The following example demonstrates how the exception works.

Employer Pays Twice

In the above example, Pronto Painting (or its insurers) has essentially paid for Jim's injury twice.
Pronto's workers compensation insurer paid for the workers compensation benefits it provided to
Jim. Then Pronto's liability insurer paid the costs related to Jim's lawsuit against Classic
Construction. Both claims arose from the same injury.

In some states Jim would be required to reimburse the workers compensation insurer if the damages
he received from his lawsuit exceeded the amount of workers compensation benefits. For instance,
suppose that Jim received $100,000 in workers compensation benefits and $200,000 in damages (or
a settlement). Some states would require Jim to reimburse the workers compensation insurer for the
$100,000 it paid to him.

All state workers compensation laws in the United States incorporate a legal principle called
the exclusive remedy rule. This principle is based on a mutual compact between employers and
employees. Employers provide benefits to workers injured on the job regardless of fault. In return,
workers give up the right to sue their employer for those injuries. Workers compensation
benefits are intended to serve as workers' sole source of restitution for employment-related injuries.

While the exclusive remedy rule is firmly entrenched in most states, it is not ironclad. The rule has
some exceptions. This means that injured workers may sue their employers (or other parties) in
some situations. The specific exceptions to the exclusive remedy rule vary from state to state. Some
common exceptions are outlined below.

Dual Capacity Suits

In a dual capacity suit an injured worker sues the employer in a capacity other than as the worker's
employer. Many dual capacity suits are based on liability. For example, suppose that Jim is
employed by Tires Inc., a tire manufacturer. One day Jim is driving a company truck when a tire
blows out, causing an accident. The blown tire was made by Tires Inc. Jim is injured in the accident

18
and sues Tires Inc. for bodily injury. Jim sues Tires Inc. in its capacity as a manufacturer of a
product, not as Jim's employer.

Dual capacity suits can arise out of injuries that are not caused by a product. For instance, suppose
that Jane is employed as a waitress at the Delectable Diner. One evening when Jane is not on duty
she brings her family to the restaurant for dinner. Jane is walking to a table when she trips and
falls on some loose carpet. Jane suffers a broken arm in the fall. She sues the Delectable Diner for
bodily injury.Jane has sued the diner in its capacity as a business, not as her employer.

No Workers Compensation Coverage

An injured worker may sue his or her employer if the latter failed to provide the workers
compensation benefits required by law. The worker may have the option to sue either
for compensatory damages or for the workers compensation benefits he or she should have received.

Intentional Harm

Workers may sue an employer for an injury the employer has inflicted on the worker intentionally.
For example, Fred is Bill's employer. Fred gets into an argument with Bill and shoots Bill in the foot
with a gun. Bill files a lawsuit against Fred alleging that Fred injured Bill intentionally. Suits against
employers based on allegations of intentional harm can be difficult to prove. In some states a worker
seeking damages against an employer for intentional harm must show that the employer knew that
his or her action was substantially certain (extremely likely) to cause injury to the worker. Injured
workers are generally barred under workers compensation laws from suing co-workers for injuries
sustained on the job. However, a worker may be permitted to sue a co-employee for an injury the
co-worker caused intentionally.

Third-party Liability

Employees are typically permitted to sue a third party (other than the employer)
whose negligence caused an accident that led to the worker's injury. For example, suppose that a
restaurant employee is using a slicing machine when the machine malfunctions, injuring the worker.
The worker receives workers compensation benefits from his employer (or its insurer). The worker
then sues the manufacturer for bodily injury. The worker collects damages from the manufacturer in

19
addition to the workers compensation benefits. Depending on the state, the worker might be
obligated to reimburse the workers compensation insurer if the damages he or she receives exceed
the amount of benefits paid by the insurer.

B.GENRAL LIABILITY INSURANCE

Introduction to the General Liability Policy

MEANING
 Many small businesses purchase general liability coverage. As its name suggests, a general
liability policy is designed to cover many types of businesses. It is a generic policy that
provides the types of liability coverage most businesses need.

ISO Forms

When issuing general liability policies, many insurers utilize standard forms published by
the Insurance Services Office or "ISO". One reason is convenience. Developing policy forms is a
time-consuming task that many insurers prefer to avoid. A second reason is risk. When an insurer
drafts its own proprietary language, there is a risk that a court may interpret the language differently
than the insurer intended. The insurer may be forced to pay claims that it didn't plan to cover.
Because ISO liability forms are widely used, much of the language they contain has already been by
interpreted by the courts. Meanings have been established for specific words and phrases. Thus,
from a legal standpoint, ISO forms may present fewer risks to insurers than proprietary forms.

The CGL

The basis of the ISO liability policy is the Commercial General Liability Coverage Form or CGL.
This form provides three separate coverage:

 Coverage A, Bodily Injury and Property Damage Liability

 Coverage B, Personal and Advertising Injury Liability
 Coverage C, Medical Payments

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This article focuses on Bodily Injury and Property Damage Liability. Personal and Advertising
Injury Liability and Medical Payments coverage are addressed separately. For the purposes of this
article, we’ll assume that your firm is the named insured on your liability policy.

Insuring Agreement

The coverage afforded by the CGL is broadly described in the insuring agreement.

The policy covers sums your firm is legally obligated to pay as damages because of bodily
injury or property damage. That is, it covers claims or suits against your company by a person or
organization that has sustained bodily injury or property damage as a result of your
firm’s negligence. The CGL provides relatively broad coverage. It covers bodily injury or property
damage caused by an occurrence except for injury or damage that is precluded by an exclusion. For
Coverage A to apply, you must be legally responsible for the injury or damage. The CGL will not
cover payments you make voluntarily.

The CGL covers bodily injury or property damage:

 that occurs on your premises

 that arises from operations you are performing, on or off your premises
 that arises from work you have completed
 that arises from your products

On Your Premises

Coverage A applies to claims that arise out of injury or damage that occurs on your premises. Here
is an example. Doris operates Divine Delights, a coffee shop that sells cakes and cookies made on
the premises. Bill, a customer, enters the store and is heading to the counter when he trips and
falls over a chair. Bill injures his knee in the fall. Three months after the accident he files a claim
against Divine Delights. His claim demands reimbursement of his medical expenses related to his
knee injury. The shop’s liability policy covers the claim.

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Defense

If a lawsuit covered by Coverage A is filed against your firm, your insurer will provide an attorney
to defend you. Covered costs include attorneys’ fees, court costs, premiums and interest charged on
the judgment. All of these charges are included under a coverage called Supplementary Payments.
They are covered in addition to the policy limits.

C.Business Liability Insurance

Meaning

Business liability insurance is part of liability insurance .it is also help to business owner to reduce
risk. Coverage provided to a business owner against property damages ,personalinjury,fire damages
, and bodily injury

Types of Business Liability Insurance

a. Product Liability Insurance
b. Professional Liability Insurance
c. Error & Omission Liability Insurance
d. Public Liability Insurance
e. Director & Officer Liability Insurance

a. Product Liability Insurance

Product liability insurance protects a company against claims or suits arising from the
manufacture or sale of the company's products. It covers the manufacturer's or seller's liability
for bodily injury or property damage sustained by a third party due to a defect or malfunction of the
product. The product may be food, a machine, medicine or virtually any other goods sold to
businesses or the public. The injured third party may be a buyer or user of the product or even a
bystander.

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Types of Claims

Product liability claims are typically based on one of the following:

 Manufacturing or Production Flaw; The claimant alleges that some phase of the
production process created a defect in the final product that was unreasonably hazardous.
For example, Steve purchases a table saw at a hardware store. Steve is injured when the
blade guard flies off the saw. He sues the manufacturer, claiming that the guard was
improperly installed when the saw was manufactured.
 Design Defect; The claimant contends that the product's design is inherently unsafe. For
example, Steve (in the previous example) sues the manufacturer on the basis that the saw
was improperly designed. He contends that when the manufacture designed the saw, it failed
to ensure that the guard would remain firmly in place.
 Defective Warnings or Instructions; The claimant alleges that the seller failed to
provide adequate instructions on the proper use of the product, or that it failed to warn
buyers of the product's risks. For example, Bill buys paint thinner at a home store. Bill
becomes ill while using the product in a windowless room. He later sues the manufacturer
for failing to warn him that paint thinner should not be used in an enclosed environment.

Manufacturers and Sellers

While most product liability suits are filed against manufacturers, product sellers are vulnerable to
suits as well. Product sellers include retailers, wholesalers, distributors, and resellers. A seller may
be held liable for an injury to a product buyer if the seller helped market the product to the
consumer.

If the seller is obligated to pay damages to the injured buyer, the seller may seek reimbursement by
filing a lawsuit against the manufacturer.

Strict Liability

A manufacturer or seller may be sued on the basis of strict liability, which is liability in the absence
of negligence. Strict liability is not based on fault. An injured plaintiff may win a product liability
suit against a manufacturer or seller by proving all of the following:
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  The product contained a defect that was dangerous
 The product injured the plaintiff
 The injury occurred when the plaintiff was using the product as it was intended to be used.
For instance, the plaintiff was using a table saw to cut wood, not his hair.
 No substantial changes were made to the product after it left the seller. For instance, the
buyer didn't replace the blade guard with one he had made himself.

Damages

Plaintiffs in product liability suits may receive compensatory damages, including medical expenses,
loss of income, and pain and suffering. They may also be awarded punitive damages and attorneys'
fees.

Product liability claims may be consolidated into a class action lawsuit. Such a lawsuit can put a
company out of business.

Insurance Coverage

Product liability is covered under a general liability policy. It is covered in conjunction with
liability for work you have completed. The combined coverage is called products-completed
operations liability. This coverage is included in Coverage A, Bodily Injury, and Property Damage
Liability.

Businesses that manufacture potentially hazardous products, such as pharmaceuticals or

insecticides, may have difficulty obtaining product liability coverage from a standard insurer. They
may need to purchase this coverage separately from a specialty insurer. A surplus lines broker can
help locate insurers that offer this coverage.

The rate charged for product liability coverage depends on the nature of the product. Hazardous
products are more expensive to insure than low-hazard products. Your insurer will categorize your
business and assign an appropriate class code. The product liability premium is typically calculated
by multiplying the rate times your annual sales, and dividing the result by one thousand.

The premium you pay at the beginning of the policy period is usually based on your estimated sales.
Your insurer will adjust your premium when it conducts an annual audit. If your actual sales are less
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than your projected sales, you may receive a return premium. If your actual sales exceed your
estimated sales, you may be charged an additional premium. Note that under-reporting your sales at
the beginning of your policy is not a good strategy for lowering your premium. This tactic may
result in a substantial additional premium charge when your policy is audited.

Finally, product sellers may be afforded vendors coverage under the manufacturer's liability policy
via an endorsement. The endorsement covers the seller as an additional insured. It protects the seller
against suits that arise from defective products made by the manufacturer and sold by the seller.

Product Liability Coverage

Product liability coverage protects the business if the business is liable for damages to a person or
property caused by a product supplied, designed or manufactured by the company. If you make or
supply something, consult with your insurance professional on the need for this coverage.

Products-Completed Operations Coverage

Your business could be sued if someone is injured by a product you make or sell, or by work you
have completed. This article will explain how claims arising from your products or completed work
are covered under a general liability policy.

Manufacturers and Sellers

If your company manufactures or sells a product, your firm could be the subject of a product
liability claim. This means that someone could file a claim against you alleging that a product you
made or sold is defective, causing injury to that party or damaging his or her property.

For example, suppose that you own Chic Chairs, a company that manufactures ergonomic chairs.
Your company was recently sued by a customer named Chuck. Chuck claims that he was sitting in a
Chic chair he purchased when it unexpectedly tipped backward. He alleges that the defective chair
caused him to fall and sustain a head injury. Chuck is seeking $25,000 in damages.

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Contractors and Service Providers

Perhaps your firm doesn’t make or sell a product but performs work for someone else. In this case,
your company could be the subject of a completed operations claim. That is, someone could claim
that work you completed is faulty, and that your faulty work injured him or her or damaged his or
her property. Here is an example:

Capital Concrete performs concrete work for general contractors and commercial property owners.
Capital was recently sued by a customer, Prime Properties. Last year Prime Properties hired Capital
Concrete to construct an elevated walkway at an upscale apartment building Prime owns.

The walkway connected the parking garage to the building's side entrance. Two months after
Capital Concrete completed the work the walkway collapsed. The broken concrete damaged a stone
patio and some expensive statuary. Prime Properties is demanding $30,000 from Capital Concrete to
cover the property damage.

Negligence, Strict Liability or Breach of Warranty

Some claims involving products or completed operations are based on negligence. Others are based
on strict liability or breach of warranty. When strict liability applies, you may be held liable even if
the claimant cannot prove you were negligent. In a breach of a warranty claim, the claimant
typically alleges that you violated a warranty (guarantee) you made at the time of sale.

For example, Tom works for a retailer that sells Chic Chairs. Tom is trying to sell a chair to Bill. He
tells Bill that a Chic Chair can withstand 500 pounds. In fact, an elephant could sit on one and it
wouldn't break. Bill, who weighs 295 pounds, purchases a chair based on Tom's guarantee. Bill
takes the chair home and sits in it. The chair collapses, injuring Bill. Bill sues the furniture store
for bodily injury, alleging breach of warranty.

Products-Completed Operations Coverage

Claims arising out of your products or completed work are covered under your general
liability policy. Coverage for such claims is included under Bodily Injury and Property Damage
Liability. The latter is designated Coverage A under the standard ISO commercial general liability

26
form (CGL), on which most liability policies are based. Claims arising out of your products or
completed operations are covered unless they are specifically excluded by an endorsement.

The CGL does not cover every claim or suit involving your product or completed work. For a claim
to be covered, all of the following criteria must be satisfied:

 The claim must allege bodily injury or property damage. If no bodily injury or property
damage has occurred, the claim will not be covered.
 The claimant must contend that the bodily injury or property damage arose out of your
product or completed work. In other words, there must be a direct connection between your
defective product or work and the injury or damage.
 The bodily injury or property damage must take place away from premises you own or rent.
It must also occur when the product is no longer in your physical possession or after your
work has been completed.

While a claim that doesn’t meet the above criteria is not a products-completed operations claim, it
may still be covered by your policy. For example, suppose you are giving some visitors a tour of
your Chic Chairs factory. A visitor is injured when he sits in a defective chair. The visitor demands
compensation. The claim will likely be covered under Bodily Injury and Property Damage Liability.
However, the injury occurred on your premises, so the claim will be covered as a premises liability
claim, not a product liability claim.

Similarly, suppose that Capital Concrete is in the process of constructing the elevated walkway
when the partially-completed structure collapses. The damage to Prime Properties’ statuary and
stone patio will likely be covered by Capital Concrete’s general liability policy under Coverage A.
However, the damage has arisen from Capital Concrete's ongoing operations, not its completed
operations.

Policy Limits

Claims arising out of your products or completed work are subject to both the
Each Occurrence limit and the Products-completed Operations Aggregate limits in your policy. The
aggregate limit is the most your insurer will pay under your policy for damages
or settlements arising from your products and/or completed operations.

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Exclusions

If your product or completed work is faulty or is not what you promised, your liability policy will
not cover the cost to remake or redo it. The following three exclusions make this clear. They are
located in the “exclusions” section under Coverage A.

Damage to Your Product

Your liability policy does not cover claims based on damage to your product or a part of your
product. For a claim to be covered, it must involve damage to property other than your product. For
instance, suppose that a customer purchases a chair made by Chic Chairs from a retailer. The
customer then files a claim against Chic Chairs, alleging that the chair he bought was broken when
he took it out of the box. Because no property other than the product has been damaged, the claim
will not be covered under Chic Chair’s liability policy.

Damage to Your Work

Likewise, your policy will not cover claims for property damage to your completed work. In the
first Capital Concrete example, the elevated walkway collapsed after Capital completed it. Suppose
that Prime Properties sued Capital Concrete for the damage to the walkway only. The walkway was
Capital’s completed work; thus, the claim would not be covered under Capital Concrete’s liability
policy. If Prime Properties sought compensation for damage to other property (like the statuary and
the patio) that was damaged by the collapsed walkway, that damage would be covered.

The Damage to Your Work exclusion contains an exception for work performed by subcontractors.
This exception is designed to protect contractors from claims stemming from defective work
performed by subcontractors. If Capital Concrete had hired a subcontractor, Crazy Concrete, to
build the walkway, and Capital was sued because of Crazy Concrete’s faulty work, the claim would
probably be covered.

Damage to "Impaired" Property

This exclusion can be confusing. Essentially, it excludes damage to property that is defective or
unusable because it contains your defective product or defective work. Such property can be

28
restored to use by removing your defective work or product. For example, Capital Concrete was
hired by a general contractor to construct the concrete foundation of a new building. Other
contractors constructed the remainder of the building. Unfortunately, Capital used the wrong type of
concrete and the foundation has cracked. The building is now unusable. If the building owner
demands that Capital Construction repair the foundation, Capital's liability insurer is unlikely to pay
the cost of the repairs.

No Coverage for Product Recalls

Finally, if you are forced to withdraw a faulty product from the market your policy will not cover
the costs of the recall. You can insure your firm against some of those costs by purchasing Limited
Product Withdrawal Expense Coverage.

b. Professional Liability Insurance

Business owners providing services will need to consider having professional liability insurance
known as "errors and omissions".

This coverage protects your business against malpractice, errors, negligence and omissions.
Depending on your profession, or an individual contract, it may be a legal requirement to carry such
a policy. Doctors require coverage to practice in certain states. Technology consultants often need
coverage in independent contractor work arrangements.

Errors and omissions liability insurance (or E&O insurance for short) covers claims that arise from
your negligent acts or your failure to provide the level of advice or service that was expected. It is
also called professional liability insurance.

The word professional is often associated with lawyers, bankers, physicians and others who require
extensive education to perform their duties. Yet, you need not be a doctor or lawyer to have a
professional liability exposure.

Virtually any business that performs a service or provides advice to others in exchange for a fee
could be sued on the basis that it failed to fulfill its professional obligations. Here is an example.

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DEFINITION of 'Professional Liability Insurance'

Insurance that protects professionals such as accountants, lawyers and physicians against negligence
and other claims initiated by their clients. It is required by professionals who have expertise in a
specific area because general liability insurance policies do not offer protection against claims
arising out of business or professional practices such as negligence, malpractice or
misrepresentation

Who Needs Professional Indemnity Insurance?

As we’ve discussed previously, professional indemnity insurance is a type of liability insurance that
protects individuals and companies involved in providing professional advice and services.

It covers a part of the total damages awarded to clients in a civil lawsuit and legal costs associated
with defending the client’s negligence claim. Clients may claim damages on the basis of an act, a
breach or omission during the course of discharge of professional duty by an individual or a
company.

If an omission or a mistake causes a financial loss or injury to your customer, he/she may take the
legal route in order to recover the losses suffered by him/her. If such a situation arises during the
course of practicing your profession, the PII protects your assets as well as your reputation.

Professional indemnity insurance operates on the basis of the claims made during the period when
the policy is in force. This is to say that the policy responds after a claim is notified and not at the
time of occurrence of the event.

It is, therefore, very important that you renew your policy each year and maintain continuity as
claims have often been made many years after the completion of services.

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But who actually needs this type of insurance? We’ve listed a few professions
below:

1. Business and Management Consultants

They include marketing, training and education consultants. When you are involved in advising
businesses on a day-to-day basis, unintentional incidents do occur. An accident at the premises
where you work, an error in some work or the theft of expensive equipment can have a serious
financial impact on your business.

2. IT Professionals

IT professionals include IT consultants, contractors, developers and programmers. Often, IT

projects do not go according to the plan. As a professional, the risks that you have to deal with
include writing a program that is not suitable, damaging a laptop of the client or even a burglary at
your office. Sometimes, the financial consequences can be very serious when such an event occurs.

3. Recruitment Consultants and Agencies

Only a few businesses have the resources to overcome an unforeseen event. The risks faced by
recruitment agencies and consultants include improper referencing checks on candidates, injury that
happens to a visitor at the office and loss of client’s confidential data, among many others.

4.Designers

They include graphic and web designers and interior designers. Some of the risks of practicing
these professions include incorrect specification, theft of computer in which expensive software
is loaded and even slipping and falling of a visitor at your office.

5. Fitness Professionals

Few fitness professionals such as dance teachers, yoga instructors and personal trainers realise that
an unforeseen event could seriously damage their reputation. Moreover, filing of a lawsuit by one of
your clients as regards the quality of a service provided by you or an injury sustained during a

31
training program because of your negligence and the loss of expensive training equipment can cost
you a lot of money.

6. Teachers and Tutors

Teaching students involves a host of risks. A student injuring himself/herself at your tutoring place
or an allegation about poor tutoring can seriously impact your business.

What Are Some Additional Benefits of Having a PI Policy?

First of all, it ensures that you don’t go bankrupt if one of your clients files a lawsuit and claims
damages. Secondly, it covers a part of the legal costs associated with defending a negligence claim
and finally, it enables you to do your business with peace of mind.

Rule 3-410 Disclosure of Professional Liability Insurance

(A) A member who knows or should know that he or she does not have professional liability
insurance shall inform a client in writing, at the time of the client's engagement of the member, that
the member does not have professional liability insurance whenever it is reasonably foreseeable that
the total amount of the member's legal representation of the client in the matter will exceed four
hours.

(B) If a member does not provide the notice required under paragraph (A) at the time of a client's
engagement of the member, and the member subsequently knows or should know that he or she no
longer has professional liability insurance during the representation of the client, the member shall
inform the client in writing within thirty days of the date that the member knows or should know
that he or she no longer has professional liability insurance.

(C) This rule does not apply to a member who is employed as a government lawyer or in-house
counsel when that member is representing or providing legal advice to a client in that capacity.

(D) This rule does not apply to legal services rendered in an emergency to avoid foreseeable
prejudice to the rights or interests of the client.

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(E) This rule does not apply where the member has previously advised the client under Paragraph
(A) or (B) that the member does not have professional liability insurance.

Do I need professional liability insurance?

Professionals that operate their own businesses need professional liability insurance in addition to
an in-home business or business owners policy. This protects them against financial losses from
lawsuits filed against them by their clients.

Professionals are expected to have extensive technical knowledge or training in their particular area
of expertise. They are also expected to perform the services for which they were hired, according to
the standards of conduct in their profession. If they fail to use the degree of skill expected of them,
they can be held responsible in a court of law for any harm they cause to another person or business.
When liability is limited to acts of negligence, professional liability insurance may be called "errors
and omissions" liability.

Professional liability insurance is a specialty coverage. Professional liability coverage is not

provided under homeowners endorsements, in-home business policies or business owners policies
(BOPs).

If you provide a professional service or regularly give advice to clients, you are vulnerable to the
prospect of lawsuits from dissatisfied or unscrupulous clients. The danger of a lawsuit is always
there, even if you’ve done nothing wrong, and we all know how costly attorneys can be.

Advantages of professional liability insurance

Policy Wording and Coverage Availability

One disadvantage of professional liability insurance is that no standard policy wording exists.
Reading the individual policy carefully is important to ensure that it fits your particular situation.
For example, some policies may not cover punitive damages, which could cost you a considerable
amount of out-of-pocket expense. Also, not every professional liability insurance provider offers
coverage for your particular business. Some providers specialize in certain kinds of businesses. You
may have to invest extra time to search for a suitable provider.

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Uncontrollable Premium Cost Factors

Another disadvantage of professional liability insurance is that the premium, or cost, is based mostly
on factors outside of your control. Factors such as the number of claims filed in your industry, your
company's current financial status, how long you've been in business and state laws all affect the
rates of your premium. If, for instance, you have a new business with a fledgling financial status in
an industry with a history of claims, your premium could be considerable.

Ability to Lower Premiums

An advantage of professional liability insurance is that you can influence some of the factors that
control the cost of the premium. A main way to control the cost is to reduce risks in the workplace.
For instance, ensure employees have the proper background to carry out their duties. Also, require
employees to complete safety training, and always provide safe and well-equipped working
conditions. Whether or not such factors will affect your overall premium significantly depends
partly on your business' type and status.

Affordable and Time-Saving Protection

Even though the premium for professional liability insurance can be high, the insurance can save
you considerable expense if you have to make a claim. If, for instance, you install security systems
and a client's system fails, causing him a great financial loss, you could be sued. A lawsuit often
involves considerable expense. If you don't have professional liability insurance, you will have to
pay for the costs out of your own pocket. If, however, you have professional liability insurance, the
costs are covered up to your policy's limits.

C. Error &Omission Liability Insurance

If you are a “traditional professional” like a physician or attorney, you may obtain errors and
omissions coverage under a policy form that is specific to your profession. For instance, an attorney
will likely be insured under a lawyer’s professional liability policy. If you are a “non-traditional
professional” like a consultant or real estate broker, your coverage may be written on a nonspecific
policy form called a miscellaneous professional liability policy.

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There is no standard E&O policy, so policy forms may vary considerably from one to the next. Yet,
E&O policies do have certain features in common

Feature Of Errors & Omission Liability Insurance

Claims-made

Most errors and omissions policies are claims-made. This means that they limit coverage to claims
made during the policy period. Some policies also limit coverage to claims reported during the
policy period. Many E&O policies specify a retroactive date in the declarations. This should be the
inception date of your first claims-made E&O policy. If a retroactive date is listed, then
your policy will cover a claim only if it results from an act, error or omission that was committed on
or after that date. The retroactive date should remain the same each time your policy is renewed.

Insuring Agreement

The coverage your policy provides is summarized in the insuring agreement. This clause typically
begins with the words “We will pay". The insuring agreement is a statement outlining what the
insurer promises to do in exchange for the premium. A typical E&O insuring agreement states
something like this:

"We will pay on behalf of the insured loss that the insured becomes legally obligated to pay for any
claim first made during the policy period that arises out of a wrongful act."

This means that the insurer will pay damages or a settlement that you are required to pay because of
a claim based on a wrongful act. The words "pay on behalf" mean that your insurer will pay these
costs upfront rather than reimbursing you.

The term wrongful act usually means a negligent act, error or omission that you allegedly
committed while performing or failing to perform professional services. Professionalservices may
be defined in the policy "definitions". Alternatively, the type of services covered may be described
in the declarations. An example is "software consulting services." The description of covered

35
services is important because it determines the types of activities for which you are covered. Make
sure that the description accurately reflects the services you provide.

Defense

One of the most important coverage included in an E&O policy is defense coverage. The policy
should state that the insurer will defend you against covered claims. If defense is not covered, you
will be stuck paying defense expenses out of your pocket. Depending on the specific policy terms,
defense costs may or may not reduce the policy limits. The cost of defending claims can be
substantial. Thus, look for a policy that covers defense outside the limits.

Exclusions

Here are some exclusions that are commonly found in E&O policies.

 Punitive damages
 Dishonest, fraudulent or criminal acts committed by you or another insured
 Wrongful acts you were aware of before the policy inception date
 Wrongful acts or claims you reported under a previous policy
 Bodily injury or property damage
 Fee disputes
 Profits you have gained illegally
 Failure to maintain insurance

This is not a complete list. Your policy may include additional exclusions.

Limits and Retention

Most E&O policies contain a limit that applies to each claim. This limit is the most the insurer will
pay for damages or settlements arising out of a single claim. The policy may also contain an
Aggregate limit. This is the most the insurer will pay for all damages or settlements arising out of all
claims combined. If defense costs are subject to the limits, the each Claim and Aggregate limits will
include defense costs as well.

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Some E&O policies include a retention. A retention is a type of deductible. It is the amount you
must pay out of pocket for each claim before your insurance will apply.

D P u b l i c L i a b il i t y I ns u r a n ce

Public liability insurance covers you for the cost of a claim made by a member of the public
that has suffered injury or property damage as a result of your business or a product it has supplied.
This means that it protects you against the cost of compensation to be paid out, as well as the legal
expenses incurred by the claims process.

This could mean anything from a client or member of the public slipping on a wet floor on your
business premises, to tripping over your work equipment when you're visiting them at theirs. It also
covers you for damage to property. For example, if a member of the public were to claim you'd
broken their laptop whilst visiting them on business, you’d be covered for the cost of compensation
owed to them, up to the limit of your policy.This policy covers the amount which the insured
becomes legally liable to pay as damages to third parties as a result of accidental death, bodily
injury, loss or damage to the property belonging to a third party.

Types of Public Liability Insurance Policies

1 Public Liability Industrial Risks - For manufacturing units, godowns and warehouse

2 Public Liability Non Industrial Risks - For Non Manufacturing entities like IT companies, BPOs,
Hotels, Schools, Restaurants and Clubs

3 Public Liability Act - This is a mandatory policy to be taken by owners ,users or transporters of
hazardous substance as defined under Environment (Protection) Act 1986 in excess of the minimum
quantity specified under the Public Liability Insurance Act 1991.

How to select the sum insured?

37
 In Public Liability Policy, the sum insured is referred to as Limit of Indemnity. This limit is fixed
per accident and per policy period which is called Any One Accident (AOA) limit and Any One
Year (AOY) limit respectively. The ratio of AOA limit to AOY limit can be chosen from the
following :

 1:1

 1:2

 1:3

 1:4

The AOA limit which is the maximum amount payable for each accident should be fixed taking into
account the nature of activity of the insured and the maximum number of people who could be
affected and maximum property damage that could occur, in the worst possible accident in the
insured's premises.

In the case of Public Liability Insurance Act 1991, the AOA limit should represent the paid up
capital of the company subject to maximum of Rs.5 corers. The AOY limit is fixed at 3 times the
AOA limit (Max.Rs.15 Corers).

Add On Covers
Liability Policy can be extended to cover legal expenses arising out of

 Sudden and Accidental Pollution

 Act of God Perils,

 Transportation Risk

 Carriage of treated effluents etc.

 Coverage for defense cost incurred with prior consent

 Deliberate, willful or intentional non-compliance of any statutory provision.

Exclusions
The policy will not pay for claims arising out of

 Intentional non-compliance of any statutory provision

38
 Loss of goodwill

 Slander, fines, penalties, libel, false arrest, defamation, mental injury etc.

Who needs public liability insurance?

Most businesses could be exposed to public liability risks and very few would be immune to a claim
for compensation being brought against their business. Don't forget, even unfounded claims can be
costly to deal with.

 Business owners

Even though we all strive to work with utmost precision, accidents do happen. And if they
do, a member of the public (including customers and clients) can make a claim for
compensation. So if you’re a business owner, it's worth considering apublicliabilitypolicy,
which can offer you the peace of mind that you're protected should something unexpected
happen.

 Self-employed

If you're self-employed, pubic liability insurance can also offer essential financial protection
against claims made by your customers or any member of the public. For example, if you're
a freelance photographer and a client were to claim that you had dropped your camera on
their car, damaging the paintwork, public liability insurance could cover the compensation
owed to them by you.

Do I need public liability insurance?

If your business premises are visited by clients, or if your employees regularly work off-site, it may
be worth considering this type of cover. If you work from home, you might assume you don’t need a
policy, but this isn’t necessarily the case.

Say for example, you decide to take a marketing stand at your industry’s big trade show to get some
publicity for your firm. But during the show one of the boards falls off and injures a passer-by – an
embarrassing episode could turn into a costly one if that person decides to sue.

39
Also, if you visit clients’ premises or have access to their equipment then it’s worth considering
buying public liability cover, because if you inadvertently damage their property you may have to
pay the cost of repairing or replacing it.

How much does public liability insurance cost?

How much you pay for cover depends on the size and type of your business, and the level of risk it
undertakes. Discuss this with your insurer before you buy your policy in order to assess what level
of cover provided is right for your business.You may find clients expect you to have a minimum
level of cover, according to your area or industry. This is often the case for businesses working with
the public sector where the minimum requirement is usually between £5-10 million.

Is public liability insurance a legal requirement?

Choosing not to purchase public liability insurance will not land you with a jail sentence or a hefty
fine. But having the right insurance can make your business look more professional and offer you
peace of mind. You don’t want to get into a spat with one of your best clients over the consequences
of an accident or damage to one of their properties. Getting a public liability policy means you can
let your insurer deal with any problems, while you get on with running your business.

five reasons why you might need to review your public liability insurance:

 You take your business on the road

Do you attend exhibitions, conferences, seminars? If so, you could be held liable if an attendee at
the event injures themselves as a result of your actions (perhaps they trip over on your trade stand
for example).

 You take on staff

Once you take on employees, they (as well as volunteers, temporary workers, and anyone
carrying our work on your behalf) can increase your business’s exposure to public liability
claims.

40
  You move into new premises

When working from home you may never have had members of the public visiting your office
(although that doesn’t mean you should not have public liability cover for when you’re visiting
clients). Now you have your own separate premises, chances are you’re likely to have visitors. If
they should fall and injure themselves when on your premises, you could be held liable.

 Your clients demand it

Some organizations demand that their suppliers have public liability insurance as a condition of
working for them. Public liability will cover you should you inadvertently damage your client’s
property while on a visit.

 You work for bigger clients

The amount of liability insurance you buy is generally dependent on the size of the clients you work
for. The bigger the client, then, generally speaking, the bigger the potential liability and the more
important it is to continually review your levels of cover.

How much is enough?

When working out the right level of public liability cover for your business, you should consider
what are the main risks you face, how much the most serious claim you might face could cost (not
forgetting legal fees), and whether you have any contracts which stipulate that you have to buy a
certain level of cover. Cover is available up to £5 million and you can also be covered for other
costs such as compensation for loss of work time while attending court. It’s important to remember
that public liability insurance does not cover injury to your employees, temporary staff, students or
people on work placements. For this you need employers’ liability insurance.

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e . D i r e c t o r s A nd O f f i c e r s L i a b i l i t y i ns u r a nc e

Definition OF‘DIRECTORS And OFFICERS LIABILITY INSURANCE’

Directors and officers (D&0) liability insurance is insurance coverage intended to protect
individuals from personal losses if they are sued as a result of serving as a director or an officer of a
business or other type of organization It can also cover the legal fees and other costs the
organization may incur as a result of such a suit.

Directors and Officers Liability Insurance Policy is suitable for Directors & key officers who are in
a decision making position. These directors and officers in pursuance of their duties may take some
actions which may be in violation of certain statutes or Indian Law What it covers: The policy
provides protection to directors and officers of large companies against legal judgments and costs
arising from unlawful acts, erroneous investment decisions, failure to maintain the property,
releasing confidential information, hiring and firing decisions, conflicts of interest, gross negligence
and various other errors.

 Coverage: There are three main types of directors and officers liability coverage: Coverage
A, B, and C (detailed below). The minimum policy limits of liability are $1 million or even
$5 million, which is used for defense expenses, expenses of a claim and damages, judgments
and settlements expenses. The $1 million limit is per policy and is not shared among
individual policies.
 Exclusions: Most D&O policies will exclude coverage for fraud or other criminal acts. A
compromise is the "segregate clause" in many D&O policies, which provides coverage for
the company and other innocent parties that might be dragged into a lawsuit due to criminal
actions of another company director. Other typical exclusions are coverage for claims arising
out of prior acts, punitive damages, and bodily injury or property damage. However,
punitive damages may be covered as per the jurisdiction of the state in which the policy was
issued.

42
Coverage A: This is a personal/employee coverage that covers past, present, and future directors
and officers to help them defend themselves against claims alleging a wrongful act and the personal
liabilities they encounter for their acts. A company may not be able to indemnify its D&Os directly
because either it is not permitted by law, or by company bylaws.

Coverage B: This is corporate coverage for the company to the extent that it can or may be
permitted to indemnify its directors and officers for claims against them; however, the company is
not covered for its own liability. Therefore, during a claim the company receives the compensation;
in turn, the company then reimburses the amounts to directors and officers.

Coverage C: This is entity coverage wherein the company is insured against securities claims.
Lawsuits naming directors and officers along with other parties are common. The coverage basically
renders allocation (the portioning off of blame) unnecessary for securities claims. Additionally,
D&O policies may be composed of extensive allocation clauses that force the parties to negotiate an
allocation agreement. In case both parties are unable to reach an agreement, the policy may provide
a default or force the parties to accept arbitration.

Other Considerations: Factors such as the size and form of the company, location, mergers and
acquisitions, industry type and loss experience determine the premium rates in a typical D&O
policy. It is important to note that the insurer does not have the duty to defend the directors and
officers. Many insurers allow deductibles if they can identify the individuals named in the legal suit.
D&O policies are offered on a claims-made basis; in other words, claims must be made and reported
during the policy period. Though, the insurer holds the right to oversee the defense and approval of
defending strategies, expenditures, and settlements.

Many insurers also include employment practices liability coverage in the D&O policy. The
coverage may not be as comprehensive as a traditional stand-alone policy and may offer relatively
less coverage.

Who can take this Policy?

Any Director or Officers who are involved in making key decisions in the company

43
 Scope
 Against any loss that the Organization may incur, on account of mistaken actions taken in their
individual capacity as Directors & Officers in pursuance of their duties under Memorandum and
Articles of Association.

 Against loss arising from claims made against them by reason of any wrongful Act in their
Official capacity.

 Legal costs & expenses incurred with the written consent of the insurers arising out of
prosecution (criminal or otherwise) of any Director / officer and attendance at any investigation,
examination, inquiry or other proceedings by the authority empowered to do so.

 Expenses incurred by any shareholder of the Company in pursuance of a claim against any
Director / Officer, which the Company is legally obliged to pay, pursuant to an order of a Court.

 Provide indemnity to the estate of legal heirs or legal representatives of the Director / officer in
the event of the Director / officer becoming insolvent.

General Exclusions
 Any bodily injury, sickness, disease or death of any person or any damage to tangible property

 Dishonest, fraudulent, criminal or malicious act.

 Personal guarantee.

 Libel and slander

 Personal injury and damage to property.

 Pollution damage

 Directly resulting from goods or products manufacture or sold by the company

 Fines, penalties, punitive or exemplary damages.

 Any circumstances existing prior to inception date of policy

44
D&O liability insurance in demand after Satyam fraud

Mumbai: The fraud at Satyam Computer Services Ltd has seen an increase in demand for directors’
and officers’ (D&O) liability insurance, with at least 500 companies in India opting for this cover
recently. A D&O cover is designed to protect directors and officers of a company for any wrongful
acts that include misleading financial statements and mismanagement of funds, in respect to their
potential exposure for the personal liability which can arise in the course of performing their duties.
It also protects the company in respect of payments which it is legally permitted to make on behalf
of its directors or officers. Enquiries about D&O products have seen a jump of more than 50%.

Earlier, awareness for this product was quite low and was from large companies, mainly from those
that had private equity and institutional investors. Now even smaller companies are opting for D&O
against any possible liabilities.

Sanjay Kedia, managing director and country head at Marsh Insurance Brokers, said: “Post-Satyam
many small and mid-sized companies have started showing a lot of interest in this product. Also, the
larger ones are making sure the coverage is enough. On an average, listed companies have been
taking covers up to Rs25 crore. The premium for which would be around 0.5% of the cover. This
cover could go up to Rs500 crore depending on the company’s size.”Apart from companies from
possible risks from within, even independent director in India are becoming increasingly demanding
such protection before taking on any assignment. With increasing demand, the premium rates are
also expected to rise.

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CASE STUDY

SATYAM SCANDAL (A case study)

ABSTRACT :-

World is not only just going through economic crisis but also ethical crisis with the Corporate
frauds, Accounting scandals, Mismanagement, Bribes and many more. From Enron, WorldCom and
Satyam, it appears that corporate accounting fraud is a major problem that is increasing both in its
frequency and severity. Research evidence has shown that growing number of frauds have
undermined the integrity of financial reports, contributed to substantial economic losses, and eroded
investors confidence regarding the usefulness and reliability of financial statements. The increasing
rate of white-collar crimes demands stiff penalties, exemplary punishments, and effective
enforcement of law with the right spirit. The fraud committed by the founders of Satyam in 2009, is
a testament to the fact ―the science of conduct is swayed in large by human greed, ambition, and
hunger for power, money, fame and glory. Unlike Enron, which sank due to ―agency problem,
Satyam was brought to its knee due to tunneling effect. The Satyam scandal highlights the
importance of securities laws and CG in emerging markets. Indeed, Satyam fraud spurred the
government of India to tighten the CG norms to prevent recurrence of similar frauds in future. Thus,
major financial reporting frauds need to be studied for lessons-learned and strategies-to-follow to
reduce the incidents of such frauds in the future.

INTRODUCTION:

Satyam is the fourth largest IT Company in India. The CEO of the company RamlingaRaju has
made a scam of around $2 billion. There has been a lot of controversy regarding the misuse of the
post by the CEO of the company. The fake number of jobs which was shown by the CEO was an
abuse of power and it was a clear violation of the prevailing laws in India. This gives the impression
that in India the power and position is what matters and the people in the top position make a clear
violation of the rights provided to them

This scam has seriously affected the corporate bodies in India. The role of an incorporated company
is to satisfy desires of investors, and to channelize their investment. But most of the time
entrepreneurs play with money of the investors. There are laws to safeguards investors interest but
the Satyam scam has raised the question on the fundamental role of the government and corporate
46
governance. On 16th December, 2008 Satyam board got the approval for acquisition of Maya’s
Infrastructure and Maya’s Properties (companies owned by his relatives). However the company
could not go on with the investment plan due to resistance by the investors. Between 25th and 28th
December, 2008, 3 independent directors of Satyam board resigned and later on Mr. Raju confessed
to fraud in the form of misappropriation in the balance sheet of the company.

BACKGROUND :-

In 1987, B. RamalingaRaju ("Mr. Raju") formed Satyam in Hyderabad, India with fewer than 20
employees. Ironically, Satyam means "truth" in the ancient Indian language Sanskrit. The company
specializes in information technology, business services, computer software, and is a leading
outsourcing company in India. Satyam immediately experienced success after it issued an initial
public offering on the Bombay Stock Exchange in 1991. Established on 24th June 1987 by B.
RamalingaRaju and his brother-in-law, D. V. S. Raju, Satyam Computer Services Limited was
incorporated in 1991 as a public limited company and also got its first Fortune 500 client, Deere and
Co. In a short span of time, it became a leading global consulting and IT services company spanning
55 countries before nemesis caught up with it. It was one of the few Indian IT services companies
listed on the New York Stock Exchange. It was ranked as India‘s fourth largest software exporter,
after TCS, Infosys and Wipro. The 1990s were an era of considerable growth for the company. It
also caused the formation of a number of subsidiary companies such as Satyam Renaissance,
Satyam Info way, Satyam Spark Solutions and Satyam Enterprise Solutions; Satyam Info way (Sify)
incidentally became the first Indian internet company to be listed on the NASDAQ. Satyam
acquired a lot of businesses and expanded its operations to many countries and signed MoUs with
many multinational companies in the new millennium. Satyam added feather after feather to its cap
by becoming the first company in the world to start a programme known as the Customer-Oriented
Global Organization training in May 2000, signing contracts with numerous international players
such as Microsoft, Emirates, TRW

Technologies and Ford, claiming the privilege of being the first ISO 9001:2001 company in the
world certified by BVQI, and earning the name as a global company by opening offices in
Singapore, Dubai and Sydney. In 2005, it acquired a 100 per cent stake in Singapore-based
Knowledge Dynamix and 75 per cent stake in London based Citisoft Plc. Satyam was a company on
the fast track to success and has justifiably earned for itself a name for consulting in the area of
strategy right through to implementing IT solutions for customers. At the peak of its business,
47
Satyam employed nearly 50,000 employees and operated in 67 countries. Satyam was as an example
of India's growing success. Satyam won numerous awards for innovation, governance, and
corporate accountability. In 2007, Ernst & Young awarded Mr. Raju with the Entrepreneur of the
Year award. On April 14, 2008, Satyam won awards from MZ Consult's for being a leader in India
in corporate governance and accountability. In September 2008, the World Council for Corporate
Governance awarded Satyam with the "Global Peacock Award" for global excellence in corporate
accountability. Unfortunately, less than five months after winning the Global Peacock Award,
Satyam became the centerpiece of a massive accounting fraud.

PROBLEM BEGIN :-

Problems in Satyam begin when on December 16th, 2008; its chairman Mr. RamalingaRaju, in a
surprise move announced a $1.6 billion bid for two Maytas companies i.e. Maytas Infrastructure Ltd
and Maytas Properties Ltd saying he wanted to deploy the cash available for the benefit of investors.
The two companies have been promoted and controlled by Raju‘s family. The thumbs down given
by investors and the market forced him to retreat within 12 hours. Share prices plunges by 55% on
concerns about Sat yam’s corporate governance. In a surprise move, the World Bank announced on
December 23, 2008 that Satyam has been barred from business with World Bank for eight years for
providing Bank staff with ―improper benefits‖ and charged with data theft and bribing the staff.
Share prices fell another 14% to the lowest in over 4 years. The one independent director since
1991, US academician MangalamSrinivasan, announced resignation followed by the resignation of
three more independent directors on December 28 i.e. Vinod K Dham (famously known as father of
the Pentium and an ex Intel employee), M RammohanRao (Dean of the renowned Indian School of
Business) and Krishna Palepu (professor at Harvard Business School). At last, on January 7, 2009,
B. RamalingaRaju

announced confession of over Rs. 7800 crore financial fraud and he resigned as chairman of
Satyam. He revealed in his letter that his attempt to buy Maytas companies was his last attempt to
―fill fictitious assets with real ones‖. He admitted in his letter, it was like riding a tiger without
knowing how to get off without being eaten. Satyam’s promoters, two brothers B RamalingaRaju
and B Rama Raju were arrested by the State of Andhra Pradesh police and the Central government
took control of the tainted company. The Raju brothers were booked for criminal breach of trust,
cheating, criminal conspiracy and forgery under the Indian Penal Code. The Central Government
reconstituted Satyam's board that included three-members, HDFC Chairman, Deepak Parekh, Ex
48
Nasscom chairman and IT expert, KiranKarnik and former SEBI member C Achuthan. The Central
Government added three more directors to the reconstituted Board i.e., CII chief mentor Tarun Das,
former president of the Institute for Chartered Accountants (ICAI) TN Manoharan and LIC's S
Balakrishnan. A week after Satyam founder B RamalingaRaju’s scandalous confession, Satyam’s
auditors Price Waterhouse finally admitted that its audit report was wrong as it was based on wrong
financial statements provided by the Satyam’s management. On January 22, 2009, Satyam’s CFO
SrinivasVadlamani confessed to having inflated the number of employees by 10,000. He told CID
officials interrogating him that this helped in drawing around Rs 20 crore per month from the related
but fictitious salary accounts. Andhra Pradesh State CB-CID raided the house of
SuryanarayanaRaju, the youngest sibling of RamalingaRaju who owned 4.3 per cent in Maytas
Infra, and recovered 112 sale deeds of different land purchases and development agreements. Senior
partners S Gopalakrishnan and SrinivasTalluri of the auditing firm PricewaterhouseCoopers (PwC)
were arrested for their alleged role in the Satyam scandal. The State‘s CID police booked them, on
charges of fraud (Section 420 of the IPC) and criminal conspiracy (120B).

HOW THE FRAUD WAS UNCOVERED?

Responsible Parties:- Mr. Raju was the primary individual responsible for the fraud. Indian
authorities accused Mr. Raju, and subsidiary players such as the CFO, a managing director, the
company's global head of internal audit, and Mr. Raju's brother, with responsibility for the fraud and
filed charges against them. Additionally, Satyam's auditors and Board of Directors bear some
responsibility for the fraud because of their failure to detect it. Finally, the ownership

structure of Indian businesses contributed to the Satyam scandal.

Mr. Raju and Company Insiders' Role- Mr. Raju claimed that he overstated assets on Satyam's
balance sheet by $1.47 billion. Nearly $1.04 billion in bank loans and cash that the company
claimed to own was nonexistent. Satyam also underreported liabilities on its balance sheet. Satyam
overstated income nearly every quarter over the course of several years in order to meet analyst
expectations. Mr. Raju created numerous bank statements to advance the fraud. Mr. Raju falsified
the bank accounts to inflate the balance sheet with balances that did not exist. He inflated the
income statement by claiming interest income from the fake bank accounts. Mr. Raju also revealed
that he created 6,000 fake salary accounts over the past few years and appropriated the money after
the company deposited it. The company's global head of internal audit created fake customer

49
identities and generated fake invoices against their names to inflate revenue. The global head of
internal audit also forged board resolutions and illegally obtained loans for the company. It also
appeared that the cash that the company raised through American Depository Receipts ("ADRs") in
the United States never made it to the balance sheets. Mr. Raju initially asserted that he did not
divert any of the money to his personal accounts and that the company was not as profitable as it
had reported; however, during later interrogations, Mr. Raju revealed that he had diverted a large
amount of cash to other firms that he owned and that he had been doing this since 2004. Mr. Raju
also initially asserted that he acted alone in perpetrating the fraud. However, as noted above, Indian
authorities also charged Mr. Raju's brother, the company's CFO, the company's global head of
internal audit and one of the company's managing directors

Auditors Role

Global auditing firm Price Waterhouse Coopers ("PWC") audited Satyam's books from June 2000
until the discovery of the fraud. Several commentators criticized PWC harshly for failing to detect
the fraud. PWC signed Satyam's financial statements and was responsible for the numbers under
Indian law. It appears that the auditors did not independently verify with the banks in which Satyam
claimed to have deposits. Additionally, the fraud went on for a number of years and involved both
the manipulation of balance sheets and income statements. Whenever Satyam needed more income
to meet analyst estimates, it simply created fictitious sources and it did so numerous times without
the auditors ever discovering the fraud. Suspiciously, Satyam also paid PWC twice what other firms
would charge for the audit, which raises questions about whether .PWC was complicit in the fraud.
Furthermore, PWC audited the company for nearly 9 years and did not uncover the fraud, whereas
Merrill Lynch discovered the fraud as part of its due diligence in merely 10 days. The audit
committee of Satyam failed its duty to act on a whistle blower’s expose. As per the investigations of
SFIO, on 18 December 2008, two days after the Satyama board met and decided to acquire two
group firms Maytas Infra Ltd and Maytas Properties Ltd independent director Krishna Palepu
received an anonymous email by an alias, Joseph Abraham. That email exposed the fraud. Palepu
forwarded the email to another independent director, M. RammmohanRao, Chairman of the Audit
Committee forwarded that email to S. Gopalkrishnan, partner at Price Waterhouse, the company‘s
auditors. Gopalkrishnan told Rao over phone that there was no truth to the allegations and assured
him of a detailed reply in a proposed presentation before the Audit Committee on 29 December.
That meeting did not take place. A new date 10 January was fixed.

50
c. Board of Directors Role

Satyam's Board of Directors consisted of nine members. Five members of the Board were
independent as required by Indian listing standards. In its regulatory filings with the SEC, Saytam
revealed that it did not have a financial expert on the board during 2008. Further, concerns later
developed surrounding the Board of Directors lack of independence. The Board contained several
prominent figures in the business world, a fact that likely contributed to the lack of scrutiny that
Satyam received. Members of the Board included Krishna Palepu who is a Harvard Professor and
corporate governance expert, RommohanRao, the Dean of the Indian School of Business, and
VinodDham, co-inventor of the Pentium Processor. The Board first came under fire on December
16, 2008 when it approved Satyam's purchase of real estate companies in which Mr. Raju owned a
large stake. The Board rescinded the approval after shareholders led a revolt of the deal. Krishna
Palepu, RommohanRao, and VinodDham all resigned from the Board within two days of the
rescission of the transaction. The botched transaction provided the investors with the impression that
the Board was not actively monitoring Satyam. Furthermore, the Board should have caught some of
the same red flags that the auditor, PWC, missed. Additionally, the Board of Directors should have
been concerned with the knowledge that Mr. Raju decreased his holdings of Satyam significantly
over the three years leading up the disclosure of the fraud. Mr. Raju's holdings fell from 15.67
percent in 2005-2006 to 2.3 percent in 2009.

VICTIMS OF FRAUD

Employees of Satyam spent anxious moments and sleepless nights as they faced non‐payment of
salaries, project cancellations, layoffs and equally bleak prospects of outside employment. They
were stranded in many ways – morally, financially, legally, and socially. Clients of Satyam
expressed loss of trust and reviewed their contracts preferring to go with other competitors. Cisco,
Telstra and World Bank cancelled contracts with Satyam. ―Customers were shocked and worried
about the project continuity, confidentiality, and cost overrun. Shareholders lost their valuable
investments and there was doubt about revival of India as a preferred investment destination. The
VC and MD of Mahindra, in a statement, said that the development had "resulted in incalculable
and unjustifiable damage to Brand India and Brand IT in particular." Bankers were concerned about
recovery of financial and nonfinancial exposure and recalled facilities. Indian Government was
worried about its image of the Nation & IT Sector affecting faith to invest or to do business in the
country.
51
SATYAM TIMELINE June 24, 1987: Satyam Computers is launched in Hyderabad 1991:
Debuts in Bombay Stock Exchange with an IPO over-subscribed 17 times. 2001: Gets listed on
NYSE: Revenue crosses $1 billion. 2008: Revenue crosses $2 billion. December 16, 2008: Satyam
Computers announces buying of a 100 per cent stake in two companies owned by the Chairman
RamalingaRaju‘s sons–Maytas Properties and Maytas Infra. The proposed $1.6 billion deal is
aborted seven-hours later due to a revolt by investors, who oppose the takeover. But Satyam shares
plunge 55% in trading on the New York Stock Exchange. December 23: The World Bank bars
Satyam from doing business with the bank‘s direct contracts for a period of 8 years in one of the
most severe penalties by a client against an Indian outsourcing company. In a statement, the bank
says: ―Satyam was declared ineligible for contracts for providing improper benefits to Bank staff
and for failing to maintain documentation to support fees charged for its subcontractors. December
25: Satyam demands an apology and a full explanation from the World Bank for the statements,
which damaged investor confidence, according to the outsourcer. Interestingly, Satyam does not
question the company being barred from contracts, or ask for the revocation of the bar, but instead
objects to statements made by bank representatives. It also does not address the charges under which
the World Bank said it was making Satyam ineligible for future contracts. December 26:
MangalamSrinivasan, an independent director at Satyam, resigns following the World Bank’s
critical statements. December 28: Three more directors quit. Satyam postpones a board meeting,
where it is expected to announce a management shakeup, from December 29 to January 10. The
move aims to give the group more time to mull options beyond just a possible share buyback.
Satyam also appoints Merrill Lynch to review strategic options to enhance shareholder value.
January 2, 2009: Promoters’stake falls from 8.64% to 5.13% as institutions with whom the stake
was pledged, dump the shares. January 6, 2009: Promoters’stake falls to 3.6%. January 7, 2009:
RamalingaRaju resigns, admitting that the company inflated its financial results. He says the
company’s cash and bank shown in balance sheet have been inflated and fudged to the tune of INR
50,400 million. Other Indian outsourcers rush to assure credibility to clients and investors. The
Indian IT industry body, National Association of Software and Service Companies, jumps to defend
the reputation of the Indian IT industry as a whole. January 8: Satyam attempts to placate customers
and investors that it can keep the company afloat, after its former CEO admitted to India’s biggest-
ever financial scam. But law firms Izard Nobel and Vianale&Vianale file ―class-action suits on
behalf of US shareholders, in the first legal actions taken against the management of Satyam in the
wake of the fraud. January 11: The Indian government steps into the Satyam outsourcing scandal

52
and installs three people to a new board in a bid to salvage the firm. The board is comprised of
Deepak S Parekh, the Executive Chairman of home-loan lender, Housing Development Finance
Corporation (HDFC), C. Achuthan, Director at the country’s National Stock Exchange, and former
member of the Securities and Exchange Board of India, and KiranKarnik, Former President of
NASSCOM.

January 12: The new board at Satyam holds a press conference, where it discloses that it is

looking at ways to raise funds for the company and keep it afloat during the crisis. One such method
to raise cash could be to ask many of its Triple A-rated clients to make advance payments for
services.

FACTORS CONTRIBUTING TO FRAUD

Numerous factors contributed to the Satyam fraud. The independent board members of Satyam
(including the dean of the Indian School of Business, a Harvard Business School professor, and an
erstwhile star at Intel), the institutional investor community, the SEBI, retail investors, and the
external auditor ‐‐ none of them, including professional investors with detailed information and
models available to them, detected the malfeasance. The following is a list of factors that
contributed to the fraud: • Greed • Ambitious corporate growth • Deceptive reporting practices—
lack of transparency • Excessive interest in maintaining stock prices • Executive incentives • Stock
market expectations • Nature of accounting rules • ESOPs issued to those who prepared fake bills •
High risk deals that went sour • Audit failures‐ Internal & External • Aggressiveness of investment
banks, commercial banks, • Rating agencies & investors • Weak Independent directors and Audit
committee • Whistle blower policy not being effective

CONCLUSION :-

The Satyam fraud has shattered the dreams of different categories of investors, shocked the
government and regulators alike and led to questioning the accounting practices of statutory auditors
and corporate governance norms in India. Severe corporate governance problems emerge out of the
above-mentioned corporate wreckage. Many of these governance problems were noticed in several
other such corporate failures in USA, UK and Europe. These countries

reacted strongly to the corporate failures and codes & standards on corporate governance came to
the centre stage. Even to a casual observer of the Satyam fiasco, the enormity of the scandal is a
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great eye opener. Corporate scams and frauds committed against unwary investors have been a
regular and almost an annual feature in India. But the scale, magnitude, the reach and impact that
the Satyam scam had created is unparalleled in the corporate history of India, and as some keen
corporate observers point out, the world itself. That the reckless and couldn’t care-less’ swindlers
were operating with impunity within the Company for so long, notwithstanding the army of
professional managers, internal auditors, and independent-directors dominated board of directors,
the market regulator SEBI, the Company Law Board, the Department of Corporate Affairs and the
system of jurisprudence only go to show with what great disdain the scamsters looked at all these
institutions and authorities. There is a perception that most Indian, especially the first generation
promoters hardly make a distinction between a proprietary enterprise and a public limited company
in terms of their rights and privileges and the corresponding responsibilities and accountability. It is
a fact ―that a vast majority of Indian corporations are controlled by promoter families which while
owning a negligible proportion of share capital in their companies, rule them as if they are their
personal fiefdoms. The idea of a corporation, and the values and principles that should guide its
governance has hardly been imbibed by theses promoters. Besides, the growth of corporate culture,
not only was implanted much later in India than in the Western countries, but also checkmated by
the very same forces that make the emergence of ethical business a difficult proportion in the Indian
context. A lax administration, ill-equipped regulatory system and terribly delayed justice delivery
process only make things easier for the corporate crooks to make a killing. It is not our case that
there are more crooks in the Indian corporate world than found elsewhere, but the overall system
here is so conducive and even attractive for them to flourish, rather than make lives difficult for
them to continue their trail of crimes.

Corporate scandals especially in the United States triggered reforms in corporate governance,
accounting practices and disclosures the world over. Enron debacle in 2001 and number of other
scandals involving large US companies around that period set in motion the corporate governance
reform process and resulted in the passing of the Sarbanes-Oxley Act, 2002. The main objective of
the Oxley Act is to repose investor‘s confidence by preventing corporate

frauds and ensuring transparency and disclosures. Similar kinds of corporate governance reforms
are needed in India too. There is need to reform corporate governance in India by taking harsh
policy measures. Even though corporate governance mechanisms cannot prevent unethical activity
by top management completely, but they can at least act as a means of detecting such activity before

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it is too late. When an apple is rotten there is no cure, but at least the rotten apple can be removed
before the infection spreads and infects the whole basket. This is really what effective governance is
about. Corporate governance framework needs to be implemented in letter as well as spirit. The
increasing rates of white collar crimes demands stiff penalties and punishment. The small distortions
created by few immoral executives lad far reaching negative consequences.Hopefully, creating an
awareness of the large consequences of small lies may help some to avoid this trap.

RAJA RAJRATNAM AND GOLDMEN SACHS FRAUD CASE

Summary

In October 2009, the Justice Department charged Raj Rajaratnam, a New York hedge fund manager,
with fourteen counts of securities fraud and conspiracy. Rajaratnam, who was found guilty on all
fourteen counts on May 11, 2011, had allegedly cultivated a network of executives at, among others,
Intel, McKinsey, IBM, and Goldman Sachs. These insiders provided him with material nonpublic
information. PreetBharara, the government’s attorney, argued in the case that Raj Rajaratnam had
made approximately $60 million in illicit profits from inside information. Rajaratnam’s conviction
in fact falls into a larger post-recession crackdown on insider trading undertaken by the SEC and the
US Justice Department, led by PreetBharara.

Raj Rajaratnam was the 35th person to be convicted of insider trading of 47 people charged since
2010. This effort to prosecute insider trading has been marked by more aggressive tactics such as
wiretapping to prosecute insider-trading cases, which might otherwise be difficult to prove. This
case study will use a specific instance of insider trading from the Rajaratnam trial to examine more
general claims that insider trading ought to be legal. It will focus on Rajaratnam’s trading
immediately before and after Warren Buffet’s infusion of $5 billion into Goldman Sachs on
September 23, 2008.

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The Players

Raj Rajaratnam was the Sri-Lankan manager of the hedge fund Galleon Group, which managed $6.5
billion at its height.

Rajat Gupta is a former director at Goldman Sachs and head of McKinsey consulting. He also
served on the board of Procter & Gamble. Warren Buffet is the CEO of Berkshire Hathaway, an
investment company.PreetBharara is the United States Attorney for the Southern District of New
York

Facts and Claims

Facts

– On September 23, 2008, Warren Buffet agreed to pay $5 billion for preferred shares of
Goldman Sachs.

– This information was not announced until 6 p.m., after the NYSE closed on that day.

– Before the announcement, Raj Rajaratnam bought 175,000 shares of Goldman Sachs.

– The next day, by which time the infusion was public knowledge, Rajaratnam sold his shares,
for a profit of $900,000.

– In the same period of time financial stocks as a whole fell.

Claims

– Rajat Gupta had called Rajaratnam immediately after the board meeting at which Warren
Buffet’s infusion had been announced, and told him of the money Goldman expected to receive.

– This information was material to the price of Goldman stock, thus inciting Rajaratnam to make
the trade, something he would otherwise not have done.

Background

Insider trading may be defined as any form of trading based on nonpublic information relevant for
the fundamental value of a company (and thus the stock price). Thus, it is an activity founded in
asymmetrical information. Section 10b of the Securities and Exchange Act of 1934 governs U.S.
insider trading rules. According to Engelen and Liederkerke, “Based on this authority, the SEC
enacted Rules 10b-5 and 14e-3. […] Insiders are only liable if they breach a fiduciary duty to the

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source of the information.” Similarly, recipients of insider tips (tippees) must breach the tipper’s
fiduciary duty before the tippee becomes liable.

Furthermore, most European countries enacted insider-trading regulations in the early 1990s, and in
2003, the European Union introduced the Market Abuse Directive (MAD). The Directive excludes
primary and secondary insiders to engage in trading based on inside information, disclosing the
information to third parties, and recommending a transaction to a third party.

Ethical Analysis

Several academics, including Milton Friedman, have argued that insider trading ought to be
legal. Several other commentators have renewed that argument in articles over the past year, often
citing the Rajaratnam case. Their arguments are as follows:

1. It is difficult to prosecute
2. It is a victimless crime.
3. It increases the information in the market, thus increasing market efficiency. This argument
requires a bit more explanation. Essentially the idea is that if an insider knows that stock X is
severely over-valued, and sells his or her holdings in X, then the price of X will drop, thus
more accurately reflecting its value.
4. It increases incentives for company officers to make profits.

We will use the Rajaratnam case, specifically the instance of alleged insider trading on September
23 and 24, 2008, to examine these four claims made by proponents of legalizing insider trading:

Insider trading is difficult to prosecute.

This is an empty argument that does not address the ethics of insider trading and could be used to
justify any unethical behavior. Recent empirical evidence demolishes this argument. The
government’s new aggressive investigative techniques have made insider trading easier to
successfully prosecute. Although Rajaratnam’s defense lawyers resorted to the mosaic argument,
contending that Galleon’s trades were made not on the basis of illicitly obtained information, but
hours of diligent research, the jury nonetheless found him guilty. This case leads one to believe that
insider trading is not as difficult to prosecute as some proponents might assert.

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Insider trading is a victimless crime.

Let us consider the imaginary case of Jane Smith, an investor in Goldman Sachs stock who puts in a
sell order for 100 shares of Goldman Sachs three minutes before closing time on September 23,
2008. Now let us suppose Rajaratnam’s Galleon Group buys her shares at $119.53. The share price
then spikes when markets open the following morning, leaving Galleon with a virtually risk-free
$900,000 profit. Had Rajaratnam not bought those shares, then Jane would have sold her hundred
shares for a substantially higher price the next morning. Given that any reasonable investor would
not have sold their shares, were they in possession of the information in question, it seems that
Rajaratnam’s actions would have harmed our imaginary Jane Smith, and did harm the investors
from whom he bought 175,000 shares of Goldman Sachs stock. While nobody forced these
investors to sell, it was near to impossible for them to acquire the same information on which
Rajaratnam was trading. Thus, while trades are almost always made on asymmetrical information,
because not all investors have equal time and money to devote to market research, there is a
significant difference between information that Jane Smith could find out but did not and that which
she could not have discovered. Insider trading is therefore not a victimless crime, but rather one in
which certain investors lose money by virtue of their inability to access certain information.

Insider trading increases the amount of information in the market, thus

increasing market efficiency.

By buying 175,000 shares of Goldman stock immediately before the market closed on September
23, 2008, Rajaratnam inflated its price, making this reflect the then-unknown fact that Berkshire
Hathaway would invest $5 billion in the bank. In the short term, the argument is seems sound. It is
clear that Rajaratnam’s actions caused Goldman Sachs stock to more accurately reflect its true
value.

However, we must question if insider trading may have negative consequences that outweigh short-
term market efficiency. Upon even a cursory consideration, it appears such consequences do exist.

Frequent insider trading decreases overall trust in the markets. Insider trading allows a small group
of insiders (consisting mainly of corporate executives and hungry hedge fund managers) to profit
from non-public information. If done on a large scale over significant periods of time, legalized
insider-trading leads to a market in which the common investor feels she is always at a
disadvantage. She gives up investing in the market. Instead legalized insider trading may force this

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investor to use and pay fees for, a professional money manager, thereby incurring more costs.
Indeed, she may avoid the market altogether and invest in Treasuries. In the long term, insider
trading privileges a small group of corporate officials, destabilizing the public’s trust in the fairness
of the markets.

If non-privileged investors lose faith in the markets and stop investing, the liquidity and thus
efficiency of the market will fall. Thus, instead of making the markets more efficient as insider
trading proponents argue, insider trading makes markets LESS efficient in the long term. Legalizing
insider trading has a deleterious effect on market efficiency.

Insider trading increases the incentives for company employees to make a profit,
thus increasing productivity.

If we again consider the Galleon case it seems this argument is feeble. The only employees at
Goldman who knew of the deal with Berkshire Hathaway were apparently the directors; thus the
great majority of Goldman employees did not even have the information on which to trade, let alone
the incentive to do so. Employees at financial firms are often paid in company stock, thereby giving
the employees an incentive to do well and increase company profits. Legalizing insider trading
would not induce employees to higher production, it would merely allow them (and only senior
management in most cases) to trade their company’s stock to increase personal wealth.

Insider Trading is Illegal and Unethical

Insider trading is an unethical practice for two reasons:

(1) It is unfair. Insiders have access to information that is not given to the public.
possession of information is an advantage that cannot be competed away

because this advantage depends on a lawful privilege to which an outsider cannot acquire access.

(2) On a utilitarian basis, the greatest good for society is not achieved in the long term. It is true that
insider trading may increase market efficiency in the short-term. Yet, insider trading may in fact,
decrease efficiency in the long term. How can this decline in market efficiency happen?

Experiments in behavioral finance show economic actors do not appreciate unequal and unfair
behavior. When participants in an experiment see others in the experiment benefiting monetarily
due to what is perceived as unfair behavior, these participants forsake profits to punish the other
participant who behaves unfairly. According to the (current) rational model of economics, this
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result cannot occur because the participant who is unfairly treated prefers to maximize profits, even
if treated unfairly. However, unfairness offends human sensibilities and people may either punish
those who treat them unfairly, or opt out of the game. Thus, investors may stay out of the market if
they see rampant insider trading. If enough investors stay out of the market and instead, say, buy
government bonds only, market efficiency will be harmed.

Indeed insider trading has negative consequences for investors and markets. Analyzing the
Rajaratnam case uncovers these negative consequences. Proponents of legalizing insider trading
hold up the Rajaratnam trial as an example of the inefficacies of insider trading charges. The four
main arguments advanced in favor of legalizing insider trading do not stand up under scrutiny. Raj
Rajaratnam did act unethically by trading shares of Goldman Sachs on September 23 and 24, 2008,
and demonstrated why insider trading ought to continue to be illegal.

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RESEARCH METHODOLOGY;-

A research methodology may be define as a science of method which will be used for conducting
the research. TO carry out this study descriptive as well as analytical research design has been used.

Sources of Data; The study of project are purely based on secondary data. Secondary data
information is collected from following websites;-www.Google.com, www.yahoo.com,
www.bis.org, www.IRDA.org

Also to further improvise my knowledge on liability insurance two different cases were analysed
from two different economies.

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CONCLUSION

This project was great experience from me and I really learn lot of things from this project. This
project gave us the knowledge and information about all types of liability insurance, insurance
company offering which types of liability insurance and also about the people and their perceptions
towards liability insurance and a importance of liability insurance large and also in small business.

This project gave as knowledge in detail about all types of liability insurance and knowledge about
what covered and what are not covered in all types of liability insurance and claim procedure of
liability insurance.
Insurance company help to business to reduce risk and loss through various types of liability
insurance due to employers liability insurance protect to employee against uncertainty help of study
of satyam fraud in satyam company and liability insurance covered this liability.

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 BIBILIOGRAPHY

BOOK REFERENCES

Innovation in banking & insurance

Financial services management – DIPAK ABHYANKAR

NEWSPAPER

TIMES OF INDIA

DNA (DAILY NEWS ANALYSIS)

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