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BUCHAREST, RomaniaA recent change in Romania's corporate law has made directors and officers insurance compulsory for companies and has sparked huge demand for the cover.
Romania is the first country in the European Union to make the purchase of D&O compulsory--and it could be the last, according to Nick Foord-Kelcey, European D&O practice leader for Marsh Inc. in London.
"It is certainly unique in my experience for a country to make it compulsory," said Mr. Foord-Kelcey. "I have never heard of another country taking that approach.
"Could it become a trend? I don't know," he continued. "I don't see the frequency of problems in Europe generally that would lead to it being a compulsory insurance, so I am not sure it is going to be followed widely."
Romania became a member of the European Union at the start of this year.
The legislation, passed by Romania's parliament late last year, makes the purchase of D&O coverage compulsory for all directors of joint stock companies. That includes public and private companies with Romanian registered shareholders, or subsidiaries that are incorporated in Romania whose shares are either completely or partially owned by a non-Romanian parent company, according to sources.
About 11,500 joint stock companies are registered and operational in Romania, of which 58 are listed on the Bucharest Stock Exchange and about 1,000 on the RASDAQ Electronic Exchange, Marsh said.
Romanian companies generally are reacting positively to the change, particularly large companies and those with foreign investors, said Tiberiu Csaki, managing counsel in the Bucharest office of international law firm Salans.
"The companies are run by the board of directors, so the members of the board seem more comfortable having D&O," Mr. Csaki said.
Before the law passed, board members of Romanian joint stock companies were required to put up a nominal cash guarantee amounting to the value of 10 company shares, Mr. Csaki explained.
The amounts were so low--sometimes less than e100 ($131)--that it was "clearly obsolete," according to Mr. Csaki. He said he believes the Ministry of Justice included the insurance requirement among the recent amendments to corporate law because Romania joined the European Union on Jan. 1.
"After having Romania join the European Union, maybe they thought that something like this may be necessary in the near future," he said.
Even though coverage is required, Mr. Csaki noted that there is "no clear sanction under the law" for violators, making enforcement difficult. However, it is likely that companies will have to show proof of coverage to authorities when registering board members.
In response to the law, insurers and brokers say they are fielding many inquiries from companies that seek cover.
"D&O used to be a niche line in Romania," said Eduard Simionescu, financial and professional services practice leader for Marsh in Romania. "After December we received a lot of requests for information: What is the law? What does it mean for administrators?"
Marsh expects "a rush of companies" that previously did not have D&O to purchase policies, he added.
While the coverage can be purchased either from a local insurance company or from an international insurer, only a few insurers are currently writing D&O policies in Romania. However, that appears to be changing, said Dacian Cernestean, account manager at EOS RISQ Romania, part of the EOS RISQ network of independent brokers.
"A lot of insurers which did not (write) D&O insurance before have introduced--or are ready to introduce in the (near) future--this product in their portfolio," he said.
Some insurers on the market are able to underwrite up to e20 million ($26.2 million) in limits, Mr. Cernestean said.
Omniasig, a local insurer in Bucharest that is part of Wiener Städtische Versicherung A.G., offered directors and officers insurance before the legal requirement. Catalina Grecu, head of liability insurance at Omniasig, said that because of the law, gross premiums likely will at least double this year.
"There is capacity to buy the cover through domestic insurers," she said.
Because legal costs in Romania currently are lower than in some other European member states, such as the United Kingdom, Mr. Foord-Kelcey said he believed limits of between e1 million and e5 million ($1.3 million and $6.6 million) would be an "adequate limit for meeting domestic exposure."
However, "we would have to adjust that based on experience, because the very existence of insurance can create an increase in litigation," he noted.