[Exclusive] 'Directors and Officers Liability Insurance' Emerges as the Only Defense Amid Commercial Act Amendment... Contracts Increase Eightfold in 10 Years

Increased Responsibilities, Incomplete Protection... Re-examining D&O Insurance
1. Serious Accidents Punishment Act, Responsibility Structure Chart, and Commercial Act Amendments Draw Corporate Attention to D&O
KB Financial Sets Industry Record with D&O Coverage Limit of 95 Billion KRW... Annual Premium Reaches 10.5 Billion KRW
D&O Enrollment Expands from Listed to Unlisted Companies

Editor's NoteThe responsibilities of corporate executives are becoming increasingly burdensome. As various regulations such as the enforcement of the Serious Accidents Punishment Act, the introduction of the Responsibility Structure Chart, and the push for amendments to the Commercial Act are materializing, management teams are being exposed to a growing array of legal risks. In particular, legal liabilities such as shareholder lawsuits are critical issues that can threaten not only the company but also the personal survival of executives. Amid these developments, Directors and Officers Liability Insurance (D&O) is gaining attention as an essential safety mechanism for corporate management. D&O not only protects executives from legal liabilities arising from professional negligence, but also serves as a tool to retain and attract talented individuals. However, D&O insurance in Korea faces structural limitations, such as narrow coverage, complex exemption clauses, a claims-made basis, and the simple translation of foreign policy terms. There is an urgent need to establish an institutional foundation, revise policy terms to fit domestic circumstances, and design effective products. Through this special feature, Asia Economy examines the current state and challenges of D&O insurance.

With the introduction of the Responsibility Structure Chart and the increasing likelihood of amendments to the Commercial Act, Directors and Officers Liability Insurance (D&O) is rapidly gaining prominence. As the scope of executives' responsibilities expands, the likelihood of facing legal risks such as shareholder lawsuits also increases, prompting major companies to closely examine D&O enrollment and coverage options.

A scene depicting a company preparing to subscribe to Directors and Officers Liability Insurance (D&O) to prepare for shareholder or third-party lawsuits. ChatGPT

D&O Enrollment Increases 8.2-Fold in 10 Years

D&O is an insurance product in which the insurer compensates for damages that executives are liable for, when losses occur to the company, shareholders, or others due to executive negligence. However, intentional or illegal acts by executives are not covered. Typically, the company subscribes to the insurance and pays the premiums, while the executives are the insured parties.

D&O was first introduced in Korea in 1991, developed to cover liabilities faced by corporate expatriates overseas. However, domestically it was largely ineffective at the time, as there were few lawsuits against corporate executives due to the lack of mechanisms to protect shareholder rights. The situation changed after the 1997 foreign exchange crisis. As minority shareholders and third parties began to file numerous lawsuits to hold management accountable for corporate bankruptcies and flawed mergers and acquisitions (M&A), the number of companies subscribing to D&O surged.

According to data obtained from the Korea Insurance Development Institute and the insurance industry, the number of D&O contracts held by domestic insurers increased from 200 in 2013 to 1,645 in 2023, an approximately 8.2-fold increase. During the same period, earned premiums doubled from 28.3 billion KRW to 56.2 billion KRW, and paid claims rose 4.6 times from 3.4 billion KRW to 15.5 billion KRW. As of 2023, 14 companies, including Samsung, DB, Hyundai, Meritz, KB, Hanwha, NH Nonghyup, Lotte, Heungkuk, Hana, Shinhan EZ, MG, ACE, and Mitsui, were selling D&O insurance.

From Financial Institutions to Listed and Unlisted Companies... D&O Strengthens Legal Defense for Executives

Among Korean companies, financial institutions have the most robust D&O coverage. Due to a history of major financial accidents and recurring internal control failures, as well as the full implementation of the Responsibility Structure Chart this year, major domestic banks have long subscribed to D&O and expanded their coverage.

Currently, among Korea's four major financial groups, KB Financial has the highest D&O coverage limit at 95 billion KRW, with an annual premium reaching 10.5 billion KRW. Shinhan, Hana, and Woori Financial each have coverage limits of around 50 billion KRW. These financial groups have subscribed to D&O in a comprehensive manner that includes all subsidiary executives. Even if issues arise after executives, such as inside or outside directors, retire, insurance benefits are maintained. A commercial bank official stated, "With the introduction of the Responsibility Structure Chart, the scope of responsibility according to executive positions has become clearer, which in some ways discourages management activities. To address this, we have established D&O as a protective measure."

Listed companies, which must pay close attention to protecting shareholder rights, are also increasing their D&O enrollment. According to Financial Supervisory Service statistics, the proportion of listed companies with D&O coverage grew from 21% in 2010 to 75% in 2023. Since the enforcement of the Serious Accidents Punishment Act in January 2022, which strengthens penalties for business owners or managers in the event of fatal industrial accidents, unlisted companies are also increasingly subscribing to D&O.

Cases of D&O Utilization... Even Criminal Defense Costs Covered in Case of 'Not Guilty' Verdict

There have been numerous cases where companies have used D&O to defend against losses. A notable example is the alleged stock warrant (ELW) manipulation case involving former Mirae Asset Daewoo (now Mirae Asset Securities) CEO Lim Kiyoung. In 2011, Lim was indicted on charges of conspiring with scalpers (high-frequency traders) to provide them with improper access to the brokerage's internal computer network, which was not available to ordinary investors, and earning approximately 100 million KRW in commission income from their trades. In response, Mirae Asset Daewoo retained major law firms, including Kim & Chang and HwaWoo, spending about 800 million KRW in legal defense costs for Lim.

One year prior to the indictment, in 2010, Mirae Asset Daewoo had signed a D&O contract with Green Non-Life Insurance, with a coverage limit of 50 billion KRW and a premium of about 200 million KRW. After Green Non-Life Insurance went bankrupt, MG Non-Life Insurance took over the contract in 2013. In 2016, the Supreme Court acquitted Lim. Mirae Asset Daewoo was reimbursed about 600 million KRW in attorney fees by MG Non-Life Insurance, excluding the deductible.

This case set a precedent that D&O must cover not only civil litigation as stated in the policy terms, but also all expenses incurred in preparing for criminal litigation. Previously, insurers had refused to pay D&O benefits for criminal cases, claiming the policy only covered civil lawsuits. However, if a guilty verdict is rendered in a criminal case, coverage is still not provided. Even if some insurance benefits are paid after a not-guilty verdict in the first trial, if a conviction is handed down in a higher court, the previously paid insurance benefits must be returned.