Risk faced by Directors and how it can be covered?

Every decision taken by managers and directors brings along with its own share of risk. Wrong decisions can prove to be the proximate cause of failure for a company. If a manager or a director is at fault because they did not execute their duty properly, they are held accountable for the loss and have to bear the repercussions. In order to deal with such scenarios, Directors and Officers Liability policy is the crisis management plan to save the personal assets of directors.

All the stakeholders of the company can sue the managers or the board of directors if faced with any financial loss because of the director’s decision. Any breach of duty and authority performed by directors and key officers invites legal claims as they are personally liable for negligence or errors performed in their day-to-day conduct. Following are the range of risks faced by directors and key officers:

1. Employment-related Lawsuits:

Employees can sue directors against wrongful termination, promotions have done out of personal motives, breach of employment contract, discrimination or sexual harassment cases. Employee-related issues can be the cause of misery for directors as employment claims assume the hefty cost and consume a lot of time. Even if wrongdoing is not found, defence cost has to be incurred in order to defend the case which can cause the financial crisis.

2. Bankruptcy and insolvency of the company:

Directors and key officers are held liable in the event of bankruptcy. Shareholders can sue the directors against wrongful acts or negligence performed by directors which caused insolvency. As it is the duty of directors to act in the interest of the company and sign profitable contracts but in case of solvency, his duty of faith can be questioned and he can be held liable against wrong intent, personal motives or fraud.

Read About: Are Directors Personally Liable For Company Debts?

3. Non-compliance with law and regulations:

If a company is held liable for not paying taxes or following any unlawful practice, Directors and key officers may be held accountable for such malicious actions. If the directors fail to place proper legal procedures and compliance in the company, the active regulators and shareholders group can sue them against breach of professional duty. The consequences of failure to comply with regulations can be a levy of punitive fines on Directors and key officers.

4. Lawsuits by third party or stakeholders:

Be it shareholders, tax authority, competitors or company itself, Directors and key officers have a high magnitude of lawsuit risk as they are personally liable against negligence or breach of trust. They face internal and external liability claims. Competitors can sue you against piracy of data, shareholders can sue the directors for non-disclosure of important information, your company can sue you against fraud or breach of conduct and professional duty.

5. Lawsuits against breach of trust:

Being a director and key officer of a company, you are the responsible authority to maintain the confidentiality of crucial data. Any inaccurate disclosure to public and misrepresentation of facts in prospectus or manipulation in company’s account, cyber attack, data breach considered as a breach of trust and results in lawsuits.

The frequency of claims arising against directors and officers is increasing day by day because of accountability and compliance standards. The hefty defence cost is increasing the financial risk which could wipe out all the earnings and savings of directors and managers.

In order to get secure in today’s highly litigious environment, buying directors and officers liability policy is a safety practice. Avoiding D&O insurance is not a good idea. Directors and officers liability insurance will cover you against the probable loss that could arise while adhering duty.

Directors and Officers Liability insurance provides coverage against breach of professional duty, error and omission, professional negligence and breach of fiduciary duty etc. Since directors are answerable for their actions and decisions made, they are personally liable for the probable financial loss incurred by any stakeholders or company. Having directors liability insurance policy is an effective risk management practice and it provides a protective shield against the reputational crisis faced by directors and key officers.

It is important to include Employment Practices Liability Insurance(EPLI) cover in D&O policy to cover employee-related lawsuits. Buying directors and officers liability insurance in India is important to handle claims arising due to a violation of employment practices.

Read About: What is EPLI Cover?

Directors and officers liability policy covers the defence cost incurred in fighting the legal cases filed against directors and key officers. This insurance policy saves the personal assets of directors and officers. D&O liability policy acts as a safety net against lawsuits and instils a sense of security in directors and key officers to perform their professional services with confidence.

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