Insolvency professionals are buying insurance for themselves
Insolvency professionals are rushing to buy insurance to protect themselves before going ahead with the resolution process under the Insolvency and Bankruptcy Code (IBC). But the only glitch is that the general insurers do not offer insurance for an insolvency practitioner and modalities are being worked out for at least 15 deals that are close to being finalized the insurance companies and brokers say.
An indemnity cover is meant for professionals to cover liability falling on them as a result of errors and omissions committed by them whilst rendering professional services.
In the absence of a specific product for the industry, it has two options. One option is to incorporate an insolvency practitioner’s liability as part of existing plans. While the other is to create a new product, which is a time-consuming affair. The support of reinsurers is required to create the product and then the product needs approval IRDA.
The insurance industry sees an opportunity in this emerging practice. According to the Institute of Company Secretaries of India, over 100,000 cases (many of them pending with Debt Recovery Tribunals now) will be tried under IBC, leading to a spurt in the number of insolvency practitioners as well.
Currently, there are at least 100 cases being tried and the RBI has identified 500 large stressed accounts that could go under IBC if banks fail to finalize a resolution plan within six months.
The need for an indemnity cover becomes essential as the insolvency professional can be held responsible for mismanaging the company.
One case is that of Starlog Enterprise Ltd which was referred to the National Company Law Tribunal by ICICI Bank Ltd. The company successfully argued at the appellate tribunal that the insolvency resolution process (IRP) violated the code and some of its action resulted in loss of business from longstanding clients.
But insurance brokers which are currently working with several insurers to design an indemnity cover, believe insurers are themselves hesitant to provide a cover for insolvency professionals.
Another sticking point is the low amount of so-called deductibles that are currently being proposed. Deductibles refer to the threshold limit only beyond which insurance would kick in. In other words, it’s the skin in the game for the insured. Large amounts may be involved as the individuals are personally exposed to the risk.
That, in turn, makes it unattractive for insurance companies to provide this cover. In any case, according to a 2014 Federation of Indian Chambers of Commerce and Industry (Ficci) report, indemnity cover penetration in India is 0.04% of gross domestic product against 1.25% globally.
Even as insolvency professionals have started the resolution process under NCLT, they are taking sufficient precautions to ensure that potential damages are avoided.
Insolvency Professional Entity, or IPE, only is covered under professional indemnity.