Why don’t companies take liability covers seriously?

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A mid-sized chemical manufacturing company was left in the lurch when two workers at its unit were critically injured in an accident. Though the firm presumed their package policy covered the damages, they actually did not have any liability cover but just a basic fire product.

Liability insurance constitutes less than 10 percent of the total portfolio of general insurers. Globally, it contributes almost 30-40 percent of the overall business of non-life insurers. The stark difference is partly because of the fact that several Indian companies aren’t aware of the legal and financial liabilities they would incur during the course of business, and also because it is not mandatory.

Part of the miscellaneous insurance portfolio, liability insurance has several branches. This includes commercial general liability, public liability, professional liability as well as product liability. Further, errors and omissions, as well as directors and officers (D&O) liability policies, fall under this umbrella.

Insurers say whenever there is an untoward incident involving a large corporate entity, most of India Inc. suddenly evinces interest in buying a relevant cover. It could be against a product being withdrawn from the market due to safety concerns or even a top official being dragged to court over sexual harassment charges.

Take D&O for example. After the Companies Act was passed in 2013 and the role of independent directors was restructured to put more onus on their actions, firms were scurrying for insurance covers. Five years later, the interest seems to have fizzled out. Till now, only 10,000-12,000 such products are said to have been sold.

Insurers said even among the listed entities, the size of the covers taken by the majority companies is at least 40-45 percent lower than what is required. Depending on the business as well as the location of the offices, insurers now offer specialisations based on the risks.

For instance, if you are a manufacturing firm employing 100 people in a factory set-up, the liability coverage that you will require is much higher for workmen compensation than a software firm employing engineers in an urban area.

Cover for emerging risks like cybersecurity has also been popularised by insurance companies. Even they agree companies show interest but fail to take adequate action against cyber risks. This is despite the multiple instances of phishing, data theft as well as fraud committed using the online medium.

Both listed as well as unlisted companies need to understand the seriousness of the liabilities involved in conducting business. A bare minimum policy covering all risks is essential if the firms want to conduct operations in an efficient manner. If not, a few cases could badly impact their bottom-line and set them back by several crores of rupees.