Graña & Montero (G&M), one of the largest construction companies in Peru, has been experiencing a serious crisis since the last half of 2016, as a result of a significant fall in the value of its shares, by being related to the corruption acts of its partner, the Brazilian company Odebrecht, which according to documents published on 21 December 2016 by the US Department of Justice, paid bribes in Peru for US$29 million.

In addition, in February of this year the Peruvian news media broadcasted statements made by the former CEO of Odebrecht Latinvest in Peru to Peruvian prosecutors confirming that all the consortium partners were aware of the bribes causing G&M shares to fall sharply in the Lima Stock Exchange (BVL) and the New York Stock Exchange (NYSE).

As a result, holders of American Depositary Shares (ADSs) in the US, which hold 38.46% of the total shares, have filed civil suits against G & M.

The same fate would be faced by the Director of the AFPs in G&M, as the main shareholders of G&M were four main pension fund administrators (AFPs).

This clearly highlights the risk to which the CEOs and the Board of Directors, as well as the company itself, are exposed to being affected by actions of civil liability derived from business decisions that can be considered as negligent.

Therefore D&O covers the directors or managers from civil liability arising from the exercise of their positions, and mainly by making business decisions, being extremely useful in countries with broad assumptions of responsibility as well as in those systems in which an adequate rule of valuation of such responsibility does not exist.

In Peru, this type of coverage, as well as all civil liability insurance, have had difficulties to develop because our civil liability system and the judicial system itself have not generated the necessary incentives for the development of these products.

This reality has been changing; due to the increase of claims and compensation, but also due to globalization many Peruvian companies start listing in the stock market, extending their exposure to risk in a cross-border manner. The case of G&M offers tangible proof of this.

Co-authored by Pedro Richter Valdivia at Torres Carpio Portocarrero & Richter Abogados.