32.5.1. Main Legal Provisions on the Liability of Managers
For the purposes of this article, we will refer to all individuals who have management and decision-making powers within a company as “Administrators”. And, by way of example, but not limited to, we can mention partners, officers, managers, etc.
Therefore, to begin addressing this topic, we will provide objective and general demonstrations of the responsibility of these administrators while performing their duties within the business environment.
Therefore, the rules governing the liability of administrators and, in general, representatives and partners of corporate legal entities are defined by law, mainly in the provisions of the Civil Code – Law No. 10,406/02 and the Brazilian Business Corporation Act – Law No. 6,404/1976.
Several provisions can be exemplified here, with regard to the legal environment in which the administrator operates. The most relevant for the purposes of understanding this article is that, as a rule, a legal entity is not to be confused with its partners, associates, founders, or administrators1.
In addition, the law establishes that persons convicted of bankruptcy, malfeasance, bribery, extortion, embezzlement, or crimes against the popular economy, the national financial system, competition laws, consumer relations, public trust, or property cannot serve as administrators. The prohibition on holding administrative positions remains in effect for as long as the effects of the conviction remain2.
Furthermore, the laws that determine and establish the responsibilities of administrators provide, collectively, that the different legal provisions regarding corporate and business rules may apply for complementary purposes, filling gaps in other types of business companies that do not have specific rules3.
These laws and regulations guide various rules issued by regulatory and business supervisory bodies, such as the Brazilian Securities Commission, the Central Bank of Brazil, the Superintendence of Private Insurance, among others, which dictate the duties and responsibilities of managers and their representatives in the exercise of their business management activities in each specific area.
Another instrument for establishing performance and imposing limits within the scope of directors’ liability is the companies’ articles of association, represented by their bylaws or articles of incorporation, which must be complied with in the course of business activities.
In summary, this conglomerate of rules and regulations establishes the limits of the actions of administrators of corporate legal entities, setting guidelines for their conduct while in office.
Having demonstrated the legal environment in which administrators operate, we will now highlight the main duties pertaining to business management acts and which reflect the characteristics of related activities.
1 Articles 47 and 49-A of the Civil Code.
2 Art. 1011, §1 of the Civil Code.
3 For example, the rule set forth in art. 1011, § 2, which provides that the provisions concerning the term of office apply to general partnerships, as applicable, as well as that of art. 1053, main section, which provides that limited liability companies are governed, in the event of omissions, by the rules of general partnerships. We also mention the rule set forth in art. 1053, sole paragraph (limited liability company) and 1089 (corporation).
32.5.2. The Main Duties of Managers
Among the various duties and obligations of administrators in the field of business management, we can emphasize those set forth in art. 1011 of the Civil Code – duties of care and diligence, which comply, basically, the letter of art. 153 of the Business Corporation Act, as well as consecutive articles 155 and 157 of the same law, which describe the duties of loyalty and disclosure.
From the main duties listed above, it can be inferred that the law points to the need for administrators to act as transparently and carefully as possible, always in favor of the company and in accordance with its corporate purpose.
In this vein, administrators must perform the best and most appropriate role they have set out to do, in accordance with the basic contractual principles established in light of what is currently known as “new Civil-Constitutional Law,” namely: honesty, good faith, and social function4.
In this regard, it is not surprising that the law itself took care to stipulate, in the literal wording of articles 153 of Law No. 6,404/1976 and 1,011 of the Civil Code, that the administrator must exercise the care and diligence “that every active and honest man usually employs in the administration of his own affairs”.
Therefore, the management regularly exercised, which in this case refers to management that complies with the legal and regulatory parameters set out in the paragraphs above, exempts the administrator from legal liability, regardless of the financial results obtained and the achievement of the established business goals.
Based on the above, we can conclude that the administrator’s activity results in an obligation of means and not of results. What is required of the administrator, according to the law, is precisely that, in their decision-making, all legally established duties are taken into consideration, without considering the final result of profit or loss for the company.
As a general rule, the administrator is not personally liable to the obligations incurred on behalf of the company, provided that their liability is limited to the regular management of the company.
However, irregular management may render the administrator legally liable5 to any losses caused when he acts (i) within his duties or powers, but with fault in the broad sense (negligence and willful misconduct), and/or (ii) in violation of the law or statute to which he should have submitted. This is the rule established by art. 158 of Law No. 6,404/19766 and by art. 1,013, § 2 of the Civil Code7.
Thus, if the administrator violates the rules set forth in the paragraph above, the practice of irregular management will be characterized, in which case the administrator may be personally liable for losses incurred by third parties for any reason, with damage to their personal assets and involvement in legal and/or administrative proceedings.
Therefore, due to the financial consequences that an irregular management act can cause, companies have been using certain instruments to protect their managers, officers, and administrators.
The best-known means are (i) comfort letters or indemnity letters issued by companies in favor of their managers in order to guarantee them the security necessary to perform their business management, and (ii) liability insurance known as D&O – Directors and Officers, which will be discussed in more detail below.
4 Art. 154 of Law No. 6,404/1976. The administrator must exercise the powers conferred upon him by law and the bylaws to achieve the company’s objectives and in the company’s best interests, while satisfying the requirements of the public good and the company’s social function.
5 We can consider their liability both in the civil sphere – for the commission of any unlawful act against a third party – and in the criminal sphere, in cases such as crimes against the tax system, the economy, consumer relations, and the environment.
6 Art. 158. The administrator is not personally liable to the obligations incurred on behalf of the company and by virtue of regular management acts; however, he or she is civilly liable for any losses caused when acting:
I – within the scope of their duties or powers, with fault or intent;
II – in violation of the law or the bylaws.
7Art. 1,013. The management of the company, unless otherwise provided for in the articles of association, is the separate responsibility of each of the partners.
(…)
- 2 The administrator who carries out operations knowing or having reason to know that he or she was acting contrary to the majority is liable to the company for losses and damages.
32.5.3. Emergence of D&O and Historical Aspects
To address directors and officers liability insurance – which we will refer to hereinafter as “D&O,” short for “Directors and Officers Liability Insurance” – we will refer to the US economic scenario of the 1920s.
At that time, the United States was experiencing what was known as economic euphoria, with the supremacy of consumption of durable and non-durable goods.
With capitalism at its peak in that decade, companies and industry underwent significant development, with many of them going public by listing on the stock exchange.
As a result of increased consumption and market euphoria, industries ramped up production on a large scale, agricultural production developed significantly, and retailers and distributors inflated their inventories.
However, at a certain point, production began to slow down because consumption did not keep pace with the same euphoric rhythm.
As a result, several companies began to feel the effects of production and storage of products without sales, suffering greatly from pent-up demand.
Therefore, an economic crisis began, with the devaluation of companies, causing a major impact on those listed on the stock exchange.
The crisis reached its peak in 1929, when the New York Stock Exchange, on “Black Thursday” October 24, after consecutive declines in trading volume, literally went bankrupt.
This affected the entire US economic system, from small businesses to large companies and financial institutions.
Following the economic recovery plan, new practices began to emerge in the economic, financial, and securities markets the following year. In this regard, new rules of conduct, controls, and procedures have been instituted, essentially aimed at corporate and personal financial security.
And that is when D&O insurance emerged with great force, with the purpose of protecting business executives working in various North American companies that essentially operated on the stock exchange and could have some financial impact on their personal assets due to administrative management acts.
Since then, with widespread acceptance, D&O has evolved consistently under the label of financial protection for executive officers, migrating to other countries, especially those with which the United States had economic ties.
In Brazil, D&O insurance became relevant in the early 1990s, with insurance companies restricting the sale of policies to state-owned companies undergoing privatization.
Subsequently, with the movement of the real estate market and the growing number of IPOs (Initial Public Offerings) on the Brazilian stock exchange, which began in 2004, D&O insurance increased, with a more significant volume of contracts for managers of publicly traded companies.
In 2008, the opening of the reinsurance market in Brazil allowed this type of insurance to develop further, as the insurance market’s capacity to absorb risks increased and the average premium price fell, enabling limited and small and medium-sized companies to take out D&O insurance.
In turn, in 2014, the highlight of D&O insurance was the number of claims.
This was due to the involvement of executive managers, who were covered by D&O insurance policies, in various operations and investigations launched by the Federal Police, in particular “Lava Jato” and “Zelotes” and their subsequent developments involving leniency agreements and plea bargains.
This demonstrates the concern of insured parties and policyholders with taking out D&O insurance in times of crisis, when there is greater susceptibility to claims.
Thus, in view of the historical evolution of D&O insurance, we will now move on to the technical and practical aspects of this insurance.
32.5.4. Objectives and Main Characteristics of the Insurance
D&O is civil liability insurance that aims to protect the assets of administrators when performing their duties in the normal course of their work.
And the protection of administrators’ assets would be directly linked to the financial consequences arising from defense costs and indemnities that they may incur as a result of convictions arising from claims, which normally refer to judicial or administrative proceedings brought by third parties and related exclusively to their management acts performed on behalf of the companies to which they are linked.
Usually, a D&O policy is structured in three parts, involving the company, the director, and the insurer.
In the policy, the company is referred to as the Policyholder, which is usually the entity that takes out the insurance on behalf of its administrators, referred to as the Insured Parties.
By contractual definition, the Policyholder undertakes to the Insurance Company to act on behalf of its insured administrators, acting in accordance with the provisions of the policy and being responsible for the payment of the premium and any advance payments due to the occurrence of a potentially covered risk.
The Insured, as mentioned above, is the individual linked to the Policyholder who holds or has held an administrative or management position as a result of appointment, election, or employment contract.
With these concepts consolidated, it can be concluded that the definition of D&O insurance, when linked to its main cause, would be that of a policy which, upon payment of the premium, as a rule by the Policyholder, transfers the risk to the Insurance Company of the possible financial consequences of acts of management by the Insured, which, through culpable conduct, may affect their personal assets.
In this regard, it is important to refer back to the initial topics of this article, which demonstrate the responsibility of the administrator and regular and irregular management acts.
As already explained, as a rule, the personal liability of the administrator arises when, acting within the scope of his duties or powers, with fault or intent, or in violation of the law or statute, he causes damage to third parties, being liable for compensation for damages.
And, despite the effects of the administrator’s liability falling on his or her negligent or willful misconduct in the act of irregular management, which causes damage to third parties, for the purposes of D&O, the coverage only covers negligent acts.
This is because fraud, regardless of the type of insurance, is expressly excluded from coverage under the policy by article 7628 of the Civil Code.
Intent portrays the deliberate intention of the agent to violate the law or the rules to which he is subject, being aware that his act is unlawful and that it may cause harm to third parties.
Thus, irregular management acts committed with intent by the administrator are not a covered risk, as they distort the legal nature of the insurance contract.
In this sense, D&O insurance coverage protects against the consequences of financial losses resulting from the administrator’s wrongful management, in the form of negligence, which is the legitimate interest of taking out the insurance9.
The taking out, in turn, as defined by SUSEP Circular 637/2021, must be in the form of a claims made basis policy, as this is more appropriate for guaranteeing prolonged latency risks (known as long tail).
This type of policy provides contractual coverage for a specific wrongful act committed in the past, even if claimed at a later date, when the harmful effects on the Third Party arise.
Therefore, it is possible for the Insured to contract retroactive coverage, in addition to the term of the policy, for the purpose of granting contractual protection for any past unlawful acts, provided that such acts and their effects on third parties are unknown to the Policyholder or Insured at the time of the taking out.
In this regard, in order to determine whether a specific wrongful act committed by the Insured is subject to indemnification under a D&O policy, it is necessary to verify whether the following temporal requirements are met: (i) whether the date of the aforementioned wrongful act – characterized as the triggering event – occurred during the term of the contract or during the retroactive coverage period, and (ii) whether the claim for damages suffered by the third party was also formalized during the term of the contract or during the additional coverage periods, where applicable.
It is worth briefly clarifying that additional periods represent a specific additional period of time, after the policy has expired, granted to the Insured in specific situations, for the presentation of third-party claims for losses incurred as a result of an unlawful act that occurred during the term of the policy or within the retroactive coverage period10.
The additional period must be included in the contractual conditions in the following cases: (i) if the insurance is not renewed; (ii) if the claims-based insurance is transferred to another insurance company that does not fully accept the retroactive period of the previous policy; (iii) if, at the end of its term, the insurance is converted into occurrence-based insurance with the same insurance company or another; or (iv) if the insurance is terminated, provided that the termination did not occur due to legal determination, non-payment of the premium, or exhaustion of the maximum coverage limit of the contract with the payment of indemnities11.
It is also worth clarifying that D&O insurance policies may contain a notification clause.
This clause entitles the Policyholder or the Insured to formally report to their Insurance Company any potentially damaging facts or circumstances covered by the insurance but not yet claimed by a third party.
Once notification has been made, the policy will be linked to any future claims.
In most common market practice, D&O policies are contracted on a claims made basis, with a notification clause and unlimited retroactive coverage for events unknown to the Policyholder and Insured, which is the scenario that best meets current business needs.
8 Article 762 of the Civil Code – Any contract guaranteeing risk arising from a malicious act by the insured, the beneficiary, or a representative of either party shall be null and void.
9 Art. 757. Under the insurance contract, the insurer undertakes, upon payment of the premium, to guarantee the insured’s legitimate interest in relation to a person or thing against predetermined risks.
We also mention Law No. 15,040/2024, which is expected to come into force in December 2025 and which provides in its Art. 10:
Art. 10. The contract may be entered into for any class of risk, unless prohibited by law.
Sole paragraph. The guarantees are null and void, without prejudice to others prohibited by law:
I – of property interests relating to the amounts of fines and other penalties imposed for acts committed personally by the insured that constitute criminal offenses; and
II – against the risk of malicious acts by the insured, the beneficiary, or a representative of either, except in cases of malice on the part of the representative of the insured or the beneficiary to the detriment of the insured or the beneficiary.
10 Art. 2, II, “a” and “b” of SUSEP Circular 637/2021.
11 Art. 19, of SUSEP Circular 637/2021.
32.5.5. Main Coverage and Exclusions
As explained above, indemnifiable losses in D&O are those directly related to defense costs, indemnification, or settlements that the Insured may pay or be ordered to pay, solely and exclusively arising from an irregular act of management that is culpable, or from the investigation and determination of such act.
In this context, D&O insurance policies contain three basic types of coverage, which actually only indicate the form of payment of compensation.
As D&O, in essence, takes the form of a contract between the Insuring Company and the insured, in the interest of its administrator, the basic coverage is as follows:
- Coverage A – in this modality, the Insurance Company will pay the Insured directly for the amount of indemnities or defense costs arising from a covered risk. In this modality A, there is no interference from the Policyholder or need for the amount paid by the Insurance Company as compensation to pass through the business company.
- Coverage B – in this modality, the right to receive compensation remains with the Policyholder company. Thus, in the event that the Policyholder pays the amounts of defense expenses, indemnities, or settlements on behalf of the Insured, having contracted coverage B, it shall itself be entitled to reimbursement by the Insurance Company.
- Coverage C – this coverage is usually contracted for the sole purpose of protecting the Policyholder. The contract is entered into in the interests of the company itself, providing coverage for claims arising from the real estate market.
Thus, coverages A, B, and C offer the classic D&O insurance model, representing the essence of this insurance in terms of the risk covered.
In turn, as the D&O policy is structured as an all risks model, i.e., comprehensive coverage, provided that the risk is not listed in the contract’s exclusions, there are some additional coverages offered by Insurance Companies.
This coverage is usually closely related to the consequences of irregular management or investigation, or inquiries into such acts, and because it is a risk excluded from basic coverage, it must be purchased separately.
Among the main additional coverages, we can highlight:
- Fines and Monetary Penalties: as a result of administrative investigations, especially in regulated sectors such as banking, insurance, supplementary health, and the securities market, managers may be involved in administrative proceedings and suffer monetary penalties. The amounts resulting from the payment of these penalties may be secured by additional coverage. With the advent of SUSEP Circulars 541/2016 and 553/2017, currently revoked by Circular 637/2021, coverage for civil and administrative fines was authorized, which was previously prohibited;
- Moral, Material, and Bodily Damages: this covers defense expenses and damages that the Insured is liable to pay, indemnifying Third Parties as a result of management acts;
- Improper Labor Practices: coverage for acts committed by the Insured that cause damage to Third Parties, provided that they are related to the employment relationship with the Policyholder. In most policies, this coverage covers damages resulting from moral harassment, sexual harassment, among other practices occurring in the workplace;
- Crisis Management Expenses: this is coverage that guarantees reimbursement and assistance for the Insured and the Policyholder itself, due to the effects and results of kidnapping, extortion, detention of the Insured or their family members, which may cause financial losses to the Policyholder;
- Checking Account Freeze (Online Attachment): in the event of a freeze on the Insured’s current accounts or investments, resulting from a court order, the Insured shall be entitled to reimbursement of monthly personal expenses incurred due to the unavailability of their money. This coverage can be activated from the thirtieth day after the bank accounts are frozen.
The above list of additional coverage for D&O insurance is merely illustrative and not exhaustive.
There are several other additional coverages and assistance services that Insurance Companies offer in their D&O policies, such as coverage for retired executives, claims by Insured Parties against other Insured Parties and the Policyholder itself, among others.
In this regard, companies and their executives have, in addition to basic coverage, a wide range of additional coverage options in D&O insurance, allowing them to plan appropriately for the needs of each contractor.
With regard to the most common exclusions from D&O insurance, there are some that are unique and deserve brief mention.
In this regard, we can mention (i) damages caused by the Insured to Third Parties, when not acting on behalf of the Policyholder; (ii) environmental damages, since there is a specific type of insurance for this modality, which allows for the purchase of an individualized policy for this purpose; (iii) the intentional conduct of insured parties who, by committing a deliberate and conscious act of mismanagement, are ordered to compensate third parties; and (iv) events that have already occurred and are unequivocally known to the Policyholder and the Insured at the time the insurance is taken out.
D&O policies contain several other coverage exclusions, which are usually significant and broad in scope, since, as already explained, the policy is characterized by all risks coverage, and anything not intended to be covered must be expressly excluded.
Another important point to be clarified regarding exclusions from coverage is directly related to defense costs incurred by the Insured and reimbursed by the Insurance Company.
These amounts, once paid by the Insurance Company, often take the form of advance payments or even payments made during the course of an investigation, legal proceedings, or administrative proceedings.
Thus, if any intentional conduct or conduct related to an excluded risk or loss of rights is verified, which is only characterized as such after the Insured’s trial, and the Insurance Company has reimbursed/advanced the defense expenses, it shall be entitled to recover the amount paid in this regard.
This is because, in this case, there was an advance payment of amounts related to coverage, which was later found to be an excluded risk/loss of rights. This will enable the Insurance Company to recover the amount advanced to the Insured as defense costs.
32.5.6. D&O as a Tool to Protect Managers
In view of the foregoing, D&O insurance is seen as an important instrument for the personal protection of administrators, executives, and managers of business companies.
Managers generally experience significant moments in their roles, having to make important decisions and take important actions in the course of their activities, often in an environment where there is pressure to achieve results and find solutions to problems.
Such actions invariably place managers in a risky environment, where an act committed in the best interests of the company may be considered harmful or improper, which could result in potential personal liability.
Therefore, D&O insurance becomes an instrument of protection for the Insured, who, in the regular exercise of their duties, may put their assets at risk, given the various controls that companies are currently subject to, as well as the importance of ethical principles, compliance with codes of ethics and conduct, internal controls, and corporate governance requirements.
Finally, given the complexity of the matter, which involves corporate law and a policy with a unique contractual structure, when contracting D&O insurance, it is extremely important for the Policyholder and the Insured to consider their actual needs and characteristics in light of details that may eventually compromise their coverage in the future.
This concern with the taking out is due to the peculiarities of claims made basis insurance, which often includes a notification clause, since the policy is subject to specific conditions regarding terms such as validity, retroactivity, and additional terms, which, depending on each case, may lead to a lack of coverage for a specific situation that the Policyholder and the Insured did not expect.
References
ALVIM, Pedro. O contrato de seguro. 3. Ed. Rio de Janeiro: Forense, 2001.
FARIA, Clara Beatriz Lourenço. O seguro D&O e a proteção ao patrimônio dos administradores. 2 Ed. São Paulo: Almedina Brasil, 2015.
GOLDBERG, Ilan. O contrato de seguro D&O. 1. Ed. São Paulo: Revistas dos Tribunais, 2019.
POLIDO, Walter A. Seguros de responsabilidade civil: manual prático e teórico. Curitiba: Juruá, 2013.
http://www2.susep.gov.br/menuestatistica/SES/resp_premiosesinistros.aspx
https://www2.susep.gov.br/bibliotecaweb/docOriginal.aspx?tipo=1&codigo=40599
http://www2.susep.gov.br/bibliotecaweb/docOriginal.aspx?tipo=1&codigo=21746
https://www.infoescola.com/historia/crise-de-1929-grande-depressao/
https://edu.b3.com.br/app/covid-19/historico-de-crises-do-mercado-financeiro
Authors: Luís Fernando Garcia and Laís Cardoso
Schalch Sociedade de Advogados
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CEP: 04538-133 – São Paulo/SP
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