What is a claim under a Directors and Officers (D & O ) liability insurance?

What is a claim under Directors and Officers (D & O ) liability insurance?

Serving as Directors and Officers of any company is a challenging job. Directors and Officers are required to exercise caution while performing their managerial actions. When they fail to take reasonable care while taking various managerial decisions, they become vulnerable to lawsuits from various stakeholders like shareholders, employees, competitors, creditors, suppliers, vendors and regulators who may get affected by their wrongful act. Claims arising from various individuals or groups against directors and officers can put their personal assets to stake. In order to protect the personal liability of the directors and officers and to retain them in their crucial roles, companies often arrange for Director’s and Officer’s liability insurance coverage. 

What does D&O liability insurance policy cover?

Basically, Director’s and Officer’s liability insurance comes with complex coverages which can be structured based on the business’s risk exposure and goals. D&O liability policy can provide personal liability cover for directors and officers when they unintentionally err in their managerial decisions. The policy can also reimburse the company for the costs incurred on defending  D&O claims made against its directors and officers. As a third layer, D&O policy offers coverage to the company itself along with its directors and officers against any security claims.

Click here to know more about who and what is covered under the Director’s and Officer’s Liability Insurance.

What is a Director’s and Officer’s liability claim? What types of claims are covered under D&O policy?

D&O liability claims are usually made by various individuals or entities for the losses incurred by them due to ‘wrongful acts’ of directors and officers of the company. When directors and officers are personally held responsible for the repercussions of their managerial actions, Director’s and Officer’s liability insurance protects them from defence costs, awards and settlements related to the claim.

A good Director’s and Officer’s liability insurance policy covers a wide range of claim scenarios. A wide range of corporate issues can give rise to D&O claims. Let’s take a look at some of the claim scenarios and Director’s and Officer’s insurance claims examples.

 

  • Misrepresentation

 

Claims against directors and officers of the company may arise due to misrepresentation of a company’s financial statements, violation of the articles of association or the company’s transactions in which directors and officers hold a personal interest. All these are considered as ‘wrongful acts’ which may give rise to directors and officers liability claims. For example, if the misrepresentation is made in a financial statement of the company for securing the interest of investors, the investors may take legal action on the company and its directors and officers later for the misrepresentation. 

 

  • Breach of duty

 

Directors and officers can be sued for failing to perform their duties with reasonable care. Breach of duty by directors and officers refers to various things such as lack of supervision, negligence in the inspection of books and records of the company and failing to file annual reports etc. 

 

  • Employment-related claims

 

Claims against directors and officers of the company can be brought up by employees on many grounds such as gender discrimination, unfair termination and sexual misconduct etc. For example, if the board decides to have a headcount reduction due to drop in sales, the affected employees may file lawsuits against individual directors and officers on the grounds of unfair termination or dismissal. D&O liability insurance policy covers such claims and pays for defending the allegations made against them.

 

  • Shareholder or investor’s claim

 

Shareholders often hold decision makers (directors and officers) of the organisation responsible for its performance. Claims from shareholders may arise many contexts such as errors and omissions in company’s financial statement, misappropriation of company’s fund and incorrect disclosures etc.

 

  • Misleading information

 

When people suffer losses due to misleading information, false reports and disclosure of material facts by the directors and officers of the company. Errors and mistakes made by directors and officers in judgement can give rise to D&O claims. For example, displaying misleading information in an advertisement (such as promising something that cannot be delivered) can give rise to claims against directors and officers by customers and competitors. Such claims would be covered by Director’s and Officer’s liability insurance.

 

  • Regulatory authority and government investigations

 

It becomes the duty of directors and officers of the company to ensure their business conduct and practices are in compliance with the government and industry specific legislations. Actual and alleged breach of law would lead to thorough investigation by regulatory bodies and government authorities. Such investigations are high on cost as well as long lasting, which can take many years for completion. D&O liability insurance policy covers the penalties, fees and other legal costs involved in such regulatory investigations.

 

  • Bankruptcy related claims

 

If the company becomes insolvent and goes bankrupt, its directors and officers may be personally held liable on the allegations of insolvent trading. It is the board’s responsibility to keep creditors informed about the financial position of the company. Irresponsibility and negligence on the part of the directors and officers of the company regarding its financial positions can also give rise to D&O claims from creditors.

Considering today’s litigious business environment, D&O claims in India can arise from a variety of sources irrespective of the type and size of the organisation. The wide range of risks associated with the position of directors makes them vulnerable to more and more D&O claims. The rising number of litigations makes it imperative for companies to secure their key personnel against a variety of claim scenarios.  Click here to buy the right Directors and Officers liability insurance policy.

 

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