The critical importance of having a Directors and Officers Liability policy in the wake of the Covid-19 pandemic.

In today’s times, when Covid-19 is causing havoc both to human life and economic activity, a directors and officers liability insurance policy protects directors against many possible new and emergent risks, apart from the usual liabilities that it covers.

2020 has started on a threatening note as Coronavirus, a new strain of virus which originated in China, has been gradually spreading to the whole world. As more and more countries have been hit by Covid-19 (the disease it causes) the global economy has taken a severe hit. Currently, India is actively monitoring the spread of Covid-19, and to contain the disease from spreading, the Government has already announced a 21-day lockdown. Many other countries have also taken similar steps.

This situation has created an unprecedented challenge for businesses, which are grappling to comprehend the scale of possible financial setbacks. The Indian share market, as expected, has been highly volatile, after dropping nearly 35% from its previous peak, considering the lowest it hit in March.

At such a time the burden of keeping businesses afloat lies on the shoulders of the directors and officers of every organisation. These individuals are tasked with taking the necessary executive and managerial decisions for the best benefit of the company while steering it through its current setbacks. Though the lockdown might provide some employees a temporary reprieve from their regular duties, the directors and officers cannot enjoy this luxury. Their position requires them to be updated and abreast with the news and the ever-changing situation around them, so that they can steer their organisations correctly.

Even though directors and officers are usually skilled at handling corporate decisions, the current scenario could well leave them stumped. The Covid-19 pandemic is quite unprecedented if one looks at the last century’s history of the world. There is no handbook available to guide key company personnel like directors on steps to take during such a pandemic. They have to rely on their best judgement for taking executive decisions. However, these decisions might be insufficient to manage properly, or backfire, landing them in a lawsuit where they are held financially liable. How can they mitigate such the threat of such liabilities?

A directors and officers liability insurance policy is available to help protect an organisation’s directors and officers from any financial liability that they face due to their actions. If any director or officer of an organisation makes a mistake of omission or commission which inadvertently harms a third party, the director or officer would be financially liable for the loss caused. A directors and officers liability insurance policy covers these financial liabilities and helps directors and officers bear the financial burden of a lawsuit or legal compensation payable to the aggrieved party. The policy covers:

  • Legal expenses incurred in a lawsuit
  • Settlements payable to third parties
  • Any type of financial liability imposed on directors and officers for their mistakes

(Read this article to know how a D&O insurance policy works)

In the current scenario, when Covid-19 has raised several new questions, here’s how a directors and officers liability insurance policy prove highly relevant for their protection.

Business Continuity plan and statutory activity and disclosure related risks

The organisation is expected by its stakeholders, at such a time,  to have created a strong enough Business Continuity Plan (BCP) which typically will describe and enumerate both, the risks it faces and a set of commensurate actions for all departments for business continuity. Board meetings are expected to be held as per schedule, and necessary regulatory disclosures and filings need to be completed. Should a shareholder or other stakeholder later allege that the BCP was not comprehensive or well executed, or should any of the statutory activities or filings get missed, the directors and officers face the risk of legal action and fines. Also, the communication channels (email, text messages, video conferencing, etc.) need to be finalized for effective remote working yet such that the company’s privacy is not compromised.

A D&O insurance policy in place will help minimise the liabilities arising from such eventualities.

Employee-attendance related risks

Covid-19 has forced companies to promote work-from-home for their employees as they do not want to risk possible virus transmission and infection. However, before the work-from-home guideline was in place, in case an employee tested positive for Covid-19 that could have been contracted in office during that period, the directors and officers might face the repercussions for such an office infection.

It is also the responsibility of the company to ensure that the employees work from home and do not gather in numbers at one place for any work-related activities. Anything to the contrary might land the company and its directors and officers in trouble. Hence an audit might be necessary related to internal and external factors.

In such cases, a directors and officers insurance policy would come to the rescue of directors and officers of the organization.

Logistics and supply-chain related risks

For many companies, say in the FMCG or other sectors, their revenues depend on transportation of goods for meeting demand. If the business is not ready to deal with logistics issues due to the lockdown, its directors and officers might be held responsible for the ensuing losses. Similarly, if the supply chain of the business is not properly adapted to meet the current challenge, it might raise questions on the efficiency of the directors and officers.

If a lawsuit arises due to logistics issues, the D&O insurance policy would prove helpful.

Loss-management and disclosure related risks

While for many companies the revenues are reduced or at near-zero in the Covid-19 situation, costs might not have come down proportionately. For instance, the fixed costs or salaries might remain constant, and there could be additional Covid-19 prevention costs incurred, resulting in net losses. In such a situation the directors and officers are expected to take adequate steps to ensure minimisation of losses so that the business remains solvent. Further, shareholders or regulators may expect adequate disclosures and accurate estimates of the extent of losses incurred. If directors are alleged to have failed in performing these duties, in providing necessary disclosures or accurate estimates of losses, they could be answerable and consequently face lawsuits from the stakeholders or the regulators.

Again, a directors and officers insurance covers the financial loss arising from these.

Cybersecurity and Data Protection

Remote working might open up options for security breaches and hence data protection and cybersecurity becomes a premier concern for many organizations. So, the company needs to undertake all possible options to ensure the integrity of the organization is maintained and there are no potential security breaches possible.

This is where a valid directors and officers insurance comes handy, for any such losses arising from the same.

(Here are some other risks which directors and officers face)

The directors and officers of a company, in general, bear huge responsibilities. With the recent pandemic they need to tread even more cautiously.  Any mistake on their part can have far-reaching effects and land them in financial trouble. A D&O insurance policy is therefore critical to take and should not be avoided. The directors & officers liability policy gives the directors and officers peace of mind with the knowledge that even if any actions that were taken for the benefit of the organisation go wrong, they are covered for the liability and financial impact.

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