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CCG MEMORANDUM C:RCULAR NO.2012-10(REJSSUED)1

SUB」 ECT : DiRECTORS'&OFF:CERS'L:ABIL!TY:NSURANCE(DOL:)

DATE : 05 December2012

L UroenlvrNo Srate Poltcv lro Panctples

1. GOCCs as Significant Tools for Economic Development

Section 2 (Declaration of Policy) of Republic Act No. 10149, officiallydesignated as the "GOCC Govemance Act of 2011" (R.A. No. 10149), embodiesthe State's recognition of the potential of GOCCs to be "significant tools foreconomic development," and declares "the policy of the State to actively exerciseits ownership rights in GOCCs and to promote groMh by ensuring thatoperations are consistent with national development policies and programs."

2. GOCC Governing Boards Primarily Tasked with Control andSupervision of GOCCs

Towards achieving that State policy, Section 2 of the Act further mandatesinter alia that "the State shall ensure that . . . [t]he [G]overning IB]oards of everyGOCC and its subsidiaries are competent to carry out ltheir] functions, fullyaccountable to the State as its fiduciary, and act in the best interest of theState."'?

3. Directors/Trustees and Officers Are "Fiduciaries of the State"

By express declaration under Section 19 of R.A. No. 10149, the members ofthe Boards of Directors/Trustees and the Officers of GOCCs are designated as"fiduciaries of the State . . . [with] the legal obligation and duty to always act inthe best interest of the GOCC, with utmost good faith in all its dealings with theproperty and monies of the GOCC."3

Further, Section 20 of the Act provides that members of the Boards ofDirectors/Trustees and Officers of GOCCs occupy "Iruslee Relations to thePropefties, lnterests and Monies of the GOCC."a

4. Directors/Trustees and Officers Assume Fiduciary Duties of theHighest Level in Relation to the State and the GOCC

'ReV sed to include re∞ mmended changes ofthe Commission on Aud“

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Section '19 of R.A. No. '10149 imposes at the highest levels, "to always act inthe best interest of the GOCC, with utmost good faith in all [their] dealings withthe property and monies of the GOCC," the following fiduciary duties andobligations on the members of the Board and Officers of covered GOCC:

(a) "Act with utmost and undivided loyalty to the GOCG"s (Duty ofLoyalty);

(b) "Act with due care, extraordinary diligence, skill and good faithin the conduct of the business of the GOCC"6 (Duty of Diligence):

(c) Avoid conflicts of interest and declare any interest they may have inany particular matter before the Board' (Duty of Loyalty andTransparency);

(d) Apply sound business principles to ensure the financial soundnessof the GOCC (Duty of Competence):' and

(e) Elect and/or employ only Officers who are fit and proper to holdsuch office with due regard to the qualifications, competence,experience and integritye (Pinciple that "Management is primarilyaccountable to the Board').

Section 21 of lhe Act reiterates the standard of diligence required ofDirectors/Trustees and Officers: "The members of the Board and Officers mustexercise extraordinary diligence in the conduct of the business and in dealingwith the properties of the GOCC. Such degree of diligence requires using theutmost diligence of [a] very cautious person with due regard for allcircumstances. "'o

II. OBLIGATIoN ANo AUTHORITY OF THE GOCC TO PNOVIOC DOLICoVERAGE FoR D|RECroRS/TRUSTEES AND OFFICERS

Since the underlying principle of public corporate governance embodied in

R.A. No. 10149 is to the effect lhal"The Goveming Board of GOCCs is primarilyaccountable fo the State and other Stakeholders, and the Management ispimarily accountable to the Board," it has become imperative therefore thatGOCCs provide the members of their Boards and their Officers, not only thenecessary staff support to allow them to fulfill their role as fiduciaries of the State,but also insurance coverage under the commercially accepted term "DlREcroRS'

ANo OFFTCERS' LrABtLtrY INSURANCE" (DOLI) to afford both the GOCC and themembers of their Governing Boards and Officers the means to pursue thetrfiduciary duties and obligations "to always act in the best interest of the GOCC,with utmost good faith in all [their] dealings with the property and monies of theGOCC.",,

The recognition of the obligation of GOCCS, as well as their authority, toprovide DOLI for the members of the Governing Boards and Officers has beenexpressed under Section 31 of the CoDE oF CoRpoRATE GovenraNce roRGOCCs promulgated by the Commission as GCG Memorandum Circular No.20'r2-07, thus:

vt.

OBLtcATtoNS oF THE GOCC To DrREcroRs ANp OFFTcERS

SEc,31, Providing for Staff Suppott to Directors. - Each GOCC shall providethe members of its Governing Board with reasonable support staff and officefacilities to allow them to properly discharge their duties and responsibilities.

SEc. 32. Obtaining of Directors and Officers Liability lnsurance (DOLI). -Having imposed the highest level of responsibility and accountability on themembers of the Board and Officers, ie., that of extraordinary diligence, it is

equitable that when the GOCC itself and/or the members of the Board andManagement are sued before tribunals on matters that are within the officialfunctions and capacity and on matters where business judgment has beenexercised in good faith, that there be proper recovery of the costs of litigation andthe judgment liability imposed. lt is prudent measure therefore for every GOCC toobtain "Directors and Officers Liability lnsurance" (DOLI) coverage for itself and themembers of the Governing Board and Officers against contingent claims andliabilities that may arise from, as well as the expenses that may be incurred in

prosecuting, the actions that may be filed against the GOCC arising from theactions of the Governing Board and/or Management that may cause loss ordamage to third parties.

Nothing in this section shall be construed as to authorize the reimbursement orthe incurring of costs, such as the payment of premiums on DOLI coverage, by theGOCC on the litigation expenses incurred and the .iudgment liability decreedagainst a Director or Offlcer for breach of any of his fiduciary duties or for fraudcommitted in the performance of his or her duties to the GOCC and/or itsstakeholders.

5. Meaning and Legal Significance of "DOLI"

For purposes hereof , " Directors' & Officers' Liability lnsurance (DOLI)" refersto an indemnity coverage for GOCCs which, and their Directors/Trustees andOfficers who, are sued or included as parties to any action or pro@eding broughtagainst the government agency or instrumentality pursuant to a provision of law,

executive order or regulation by reason of their being Directors/Trustees orOfficers.

The basis for the grant of such indemnity is that such Directors/Trustees andOfficers act in the best interest of the GOCC so that any suit against them, assuch, are really suits against the GOCC.

Where the DOLI coverage is proper and lawful, the premiums paid by theGOCC constitute valid (allowable) expense on the part of the GOCC.

6. Authority to Obtain DOLI Coverage

All GOCCs covered by R.A. No. 10149, even when acting through theirGoverning Boards, shall have authority to obtain DOLI coverage for the GOCCitself and/or members of their Governing Boards and Officers, under the followingterms and conditions:

(a) The premiums on DOLI coverage shall constitute part of theannual Corporate Operating Budget of the GOCC, or insupplementary budget when the circumstances so necessitate it;

(b) Procurement of the DOLI coverage shall be consistent with allapplicable procurement laws, rules and regulations, GSIS Lawl'?,and Admin. Order No. 33 s. 1987; and

(c) As an alternative, and when the circumstances so warrant it andclearly evidenced by actuarial and feasibility studiescommissioned by the Board, a GOCC may provide for "self-insurance" by constituting a "Directors' and Officers' LiabilityFund" under the terms provided for herein.

A GOCC may obtain a DOLI proposal coverage from an lnsuranceCommission-accredited provider with terms better than what the GSIS may provideor which GSIS is unwilling to match, and such non-GSIS DOLI coverage is valid andlaMul pursuant to Section 5 of Republic Act (R.A.) No. 656, otherwise known as theProperty lnsurance Law, which among others, would require obtaining a declinationletter from GSIS.

7. "Directors/Trustees" and "Officers" Allowed DOLI Coverage

As used in this memorandum, the terms "Board of Directors/Trustees" or"Board' ot "Governing Board' ("Board') refer to the collegial body that exercisesthe corporate powers, conducts all business and controls or holds all properties,of a GOCC, whether it be formally referred to as the "Board of Directors" or"Board of Trustees" or some other term in its Charter, Articles of lncorporation orBy-laws.'3

7.1. Directors/Trustees. - Both Ex Officio and Appointive Directors shall beafforded DOLI coverage by the GOCC, as defined below:

(a) "Appointive Directors" refer to: (1) in the case of CharteredGOCCs, all members of its Board of Directors/Trustees who arenot ex officio members thereof; (2) in the case of NoncharteredGOCCs, members of its Board of Directors/Trustees whom theState nominates, or is entitled to nominate, to the extent of itspercentage shareholdings in such GOCC; and (3) in the case ofAffiliates, members of its Board of Directors/Trustees whom theGOCC nominates, or is entitled to nominate, to the extent of its

''P.D. No. 'l146 as amended by R.A No. 8291.ltaken from Section 'l (Definition of Tems) of the Code of Corporate Governance for GOCCS,

Memorandum Circular No. 2012-07

percentage shareholdings in such Affiliate.'o

(b) 'Ex Officio Board Membef' (Ex Officio Directo) refers to anyindividual who sits or acts as a member of the Board ofDirectors/Trustees by virtue of one's title to another office, andwithout further warrant or appointment.ls

(c) Altemates of Ex Officio Board Members as authorized underSection 14 of R.A. No. 10149.

7.2. Officers. - Only the following employees of the GOCC shall fall within theterm "Officer" to be entitled to DOLI coverage:'"

(a) "Board Officers" refer to Officers whose primary task is to servethe Board or to pursue the immediate functions of the Board,such as the Chairman, Vice-Chairman and the CorporateSecretary.''

(b) "Executive Officers" refers to the CEO or whoever is the highestranking officer in the GOCC, and such other corporate officer ofthe GOCC as expressly provided for in its Charter (for aChartered GOCC) or By-laws (for a Nonchartered GOCC), andsuch other senior officers, such as the Vice-President, ChiefFinancial Officer, Chief lnvestment Officer, and GeneralManager, 16 whose positions are equivalent to the rank ofDirector. Assistant Secretarv or Undersecretary in the NationalGovernment Sector. As distinguished from Board Officers,Executive Officers primarily form part of the Management of theGOCC.,'

As used in this memorandum, the term "O,!ficers" refers to both ExecutiveOfficers and Board Officers.

IV. DOLI CoVERAGE FoR GOCCS

The DOLI coverage which a GOCC may procure as constituting legitimatecompany expenditure, may be of two types or both types, namely:

(a) With the GOCC as the Beneficiary;

(b) With the Directorsffrustees and Officers as the Beneficiaries.

1!Sec. 3(b), R.A. No. 10149.

'5sec. 3ii), R.A. No. i0149.'6sec. 2io). E.o No. 24 (s.201 1).

'TTaken lrom Section 'l (Definition of Terms\ of the Code of Corporate Governance for GOCCs, GCGMemorandum Circular No. 2012-07

lsAdopted from Sec. 2(q), R.A. No. '10149. See Gunea v. Lezama,103 Phil. 553 ('1958)' Pamplona Plantation

Co. v. Acosta, 510 SCRA 249 (2006).ltaken from Section 1 (Definition of Terms\ of the Code of Corporate Governance for GOCCS, GCG

Memorandum Circular No. 2012-07

As a general proposition, therefore, a GOCC may procure DOLI for thepurpose of protecting the GOCC itself, its Directors/Trustees and Officers,against the cost of litigation and judgment liability arising from official acts of itsGoverning Board and Management.

8. DOLI With GOCC as Beneficiary

The portion of the DOLI coverage that reimburses the GOCC from thelitiqation costs incurred and the damaoes suffered due to or arisinq from thebreach of a director/trustee/officer of his fiduciary duties would be a legitimateand valid coverage under the principle that every GOCC is expected to takereasonable protection against the damages caused by its Directors/Trusteesand/or Officers even for fraud committed by them or those in breach of theirfiduciary duties. Such DOLI coverage for the GOCC is similar to the requirementfor every responsible public officer to be bonded.

Nothinq in this Memorandum shall be construed as relievino anydirector/kustee/officer from direct oersonal liability arisinq from the breach of hisfiduciarv duties.

9. DOLI With Directors/Trustees and Officers as Beneficiaries

Not all DOLI premium payments constitute valid (allowable) expense on thepart of the GOCC. Premium payments for a DOLI that cover costs incurred andjudgment liability for a Director's/Trustee's or Officer's breach of fiduciary dutiesor for fraud committed in the performance of duties is not a valid expense tocover.

The hallmark principles of responsibility and accountability in corporategovernance, and the demands that every Directorffrustee or Officer has the dutyto act in the best interest of the GOCC, to act with due care, extraordinarydiligence, skill and good faith in the conduct of the business of the GOCC,demand that every erring DirectoriTrustee or Officer must be held personally toaccount for and therefore cannot be insulated from the effects of his malfeasanceor misfeasance through a DOLI coverage.

9.1. Proper Coverage of DOLI. - By way of illustration, without any intention tomake the listing exclusive, the following are examples of proper DOLIcoverage:

(a) Costly litigations brought about by employees who have been theproper subject of disciplinary actions.

(b) Unwarranted or non-meritorious complaints filed with theOmbudsman or other disciplinary agencies for the purpose merelyof taking defensive measures to compel settlement.

(c) ln the case of GFls, costly litigations brought about by disgruntledclients or desperate borrowers seeking to evade foreclosure orrepossession of their mortgaged assets.

9.2. lmproper Coverage of DOLI. - By way of illustration, which by no means isintended to be exclusive, the following cases are examples of improperDOLI coverage:

(a) One that protects Directors/Trustees and/or Officers from thecosts of litigation and liability judgment where it is clear that theGOCC, acting through its Board of Directors or Management, hasoffended its charter or caused unreasonable damage to itsidentif ied stakeholders.

Such a DOLI coverage may be viewed to promote irresponsibilityon the part of the members of the Board or Management who actwithout care or with gross negligence, or even with fraud, takingcomfort in the mistaken belief that the DOLI coverage will protectthem from personal obligation to reimburse the GOCC thedamages it has been adjudged to pay to the aggrievedstakeholde(s).

The GOCC may properly obtain DOLI coverage in such a situationfor itself, but not for the Directors/Trustees and Officers.

(b) The use of DOLI as an "indemnity benefit" for Directors/Trusteesand Officers of a GOCC, for they are public officials for whomgovernment funds cannot be expended by way of insurancepremium payment for their personal benefit (unless mandated bylaw).

(c) DOLI coverage that provides that "the insurer shall pay the loss ofthe insured (i.e., Directors/Trustees or Officers resulting from anyclaim first made against the insured during the policy period "forany wrongful act in the insured's capacity as a Director/Trustee orOfficei' of the GOCC, except for and to the extent that the GOCChas indemnified the insured.")

This is especially so when the DOLI policy defines the term"wrongful act" as 'any actual or alleged breach of duty, breach oftrust, neglect, error, misstatement, misleading statement,omission, breach or warranty of authority or other act by thedirectors, officers or employees in their respective capacities as adirector, officer or employee of the company or as a director, orofficer of any outside entity, or any matter claimed against themsolely because of their status as a director, officer or employee ofthe company."

"With such wordings of the DOLI policy, there seems to be nodoubt that it means to cover liabilities arising fromDirector's/Trustee's or Officer's fraud, breach of fiduciary duties, orunethical conduct.

9.3. Rationale Behind Prohibition on lmproper DOLI Coverage

GOCCs cannot, through DOLI coverage, laMully provide protection orindemnity rights to their Directors/Trustees and Officers for illegal,dishonest, fraudulent or any other acts which constitute a breach of theirfiduciary duties.

Such principle is mandated under Section 4 (Norms of Conduct ofPublic Officials and Employees) of the CooE oF Cottoucr AND ErHrcALSTANDARDS FoR PuBLrc oFFrcrALS AND Emptovees,20 thus:

SEC. 4. Norms of Conduct of Public Offtcials and Employees. - (A)Every public offlcial and employee shall observe the following as standardsof personal conduct in the discharge and execution of official duties:

(a) Commitment to public interest. - Public officials and employeesshall always uphold the publac interest over and above personal interest. 4lqovernment resources and powers of their resDective offices must beemDloved and used efficientlv. effectivelv. honestlv and economicallv.Dafticularlv to avo .21 x x x

Premium payments for a DOLI that covers indemnity for the costsincurred and the judgment liability imposed for a Director'sffrustee's orOfficer's breach of his/her fiduciary duties or for fraud committed in theperformance of his duties are not valid expenses on the part of the GOCC.

On the other hand, the portion of the DOLI coverage that reimbursesthe GOCC itself from the fraudulent acts or the breach of duties ofDirectors and Officers would be legitimate and valid, and the payment ofthe premiums corresponding thereto would be legitimate expenses on thepart of the GOCC. The rationale for this position is that every GOCC isexpected to take reasonable protection against the damages caused by itsDirectors and/or Officers for fraud or breach of fiduciary duties committed.

10. Proper Structuring of Reimbursement Mechanism

It is important that in the actual implementation of the reimbursementprocess under a GOCC's DOLI coverage, only reasonable and legitimatereimbursable expenses be made, and that Directors/Trustees and Officersare not reimbursed or covered for litigation costs that actually constitute a

breach of their fiduciary duties.

More often than not, the determination of whether the Directors/Trusteesand/or Officers have breached their fiduciary duties comes only at the timewhen a judgment becomes final and executory, and which has gone throughmany years of litigation and exhausting appeals process.

ln some of the GOCCs that have procured DOLI coverage from theGovernment Service lnsurance System (GSIS), when there is a need to put

a reimbursement process during the process of litigation, the amounts

'oR.A. No. 6713.2l Emphasis supplied.

reimbursed are treated first as personal loans or advances to theDirectors/Trustees and/or Officers involved.

lf final judgment exonerates the Directors/Trustees and/or Officers fromallegation of fraud or breach of fiduciary duties, the advances are closed onthe DOLI account. Whereas, if the final judgment indicates clearly that theDirectors/Trustee and/or Officers were guilty of fraud or were in breach ofhis fiduciary duties, then the advances shall remain a personal loan whichthey must pay-off.

Each GOCC shall adopt a type of reimbursement mechanism for itsDOLI coverage that would best preserve the principles of publicaccountability.

V. DIRECTORS/TRUSTEES AND OFFICERS LIABILITY FUND

The Commission recognizes that some GOCCs may find themselves in asituation where under the mandates of their charters, taking out DOLI coveragefrom accredited insurance providers may not be a feasible alternative broughtabout by various circumstances, among which are the following:

(a) The premium costs may have proven to be prohibitive for theGOCC's situation that a procurement process would not attractaccredited insurance providers.

(b) The commercially prevailing "deductible claim" terms may actuallyleave the GOCC absorbing from its corporate coffers much of thecosts of litigations for which it has already paid high premiumrates.

(c) The reimbursement process afforded by the insurance companymay in fact be a long and tedious process that undermines theannual budget of the GOCC.

Under unique circumstances prevailing in the case of a GOCC, the GoverningBoard may find it more feasible and efficient that instead of obtaining solely aDOLI coverage, the GOCC may establish a "Dtnecrons/TRUSTEES AND OFFIcERS

LrABrLrry Furuo" based on a proper feasibility study submitted by a reputable riskagency takino into consideration the orovisions of R.A. No. 9184, and under thefollowing terms and conditions, as well as those mandated by the Commission onAudit (COA), thus:

(1) Amortization to the Fund shall come from the GOCC's budget;

(2) The Fund shall be contributed into a specific and non-revocableTrust Fund to be established by the GOCC with a GFI;

(3) The Trust lnstrument covering the Fund shall provide for the sameallowable coverage as those under a DOLI policy or may cover onlythe items that are within the deductible franchise claim provision

under an existing DOLI coverage, with the GF|-Trustee administeringthe disbursement from such Fund;

(4) ln the case where a GFI is setting up such Fund for itself and itsDirectors/Trustees and Officers, it shall constitute another accreditedGFI to assume the role of Trustee for such Fund; and

(5) Formal Guidelines shall be promulqated bv the Governino Board ofthe GOCC defininq the essential items for the DOLF. 1.e.. the cap onthe fund. overseeino leqal fund committee, evaluation of adequacy offund. coveraqe. exoenses covered. allowable indemnificationamounts, procedure for availment, bookino of the advances. etc.,which must be submitted to the GCG for formal aporoval.

To be clear, it is within the authority of the Governing Board of every GOCC toadopt a scheme which may be wholly DOL|-covered, or wholly DOlF-covered, or acombination of both, in order to ensure the most optimum coverage for the GOCC,taking into consideration the corporate operating environment, as well as theGOCC's litigation history.

Mabini Ha‖ ,Malacanan,Manila

RA:N:ER B.BUTAL:DCOmm′ ss′Oner

-FLORENC:OB.ABAD

DBM Secrefary

Chairman DOF Secrerary