If directors act correctly, they may not be held liable for debts. It is a well-acknowledged fact that a company is a separate legal entity. However, under Directors personal liability, directors may be held accountable for the company’s insolvency or non-payment of debts if the company wilfully defaults. In the case of many private investments, the investors insist that directors be personally liable for defaults or even material contractual breaches. Thus, a director can be held liable for corporate debts in certain scenarios, mainly if he has:
– Signed a personal guarantee.
– Even after knowing the company is insolvent, he has continued to prioritize shareholders over creditors.
– Sold company assets below their market value or for free.
– Overpaid himself from the company’s account, creating an overdrawn director’s loan.
– Raised funds to repay creditors via fraudulent means. If he has provided inaccurate information to obtain finance.
– Indulged in wrongful trading or breached his fiduciary duty, or made misleading statements.
The liability to pay for debts extends to legal heirs as well. This means that if a director dies, their heirs will still have to settle payments. All of this makes D&O a must-have for any company.
Directors Personal Liability (D&O Policy) – Lifesaver for Directors
When a company becomes insolvent or suffers significant losses, typically, the investors first blame the directors. Additionally, employees can also sue the directors for racial discrimination claims, unfair treatment, security-related claims, or for management buyout claims. Since the directors and management are independent of each other, so, it becomes a requisite for a company to avail a protection solution. This policy can help the company to contest contingencies and financial shortfalls. Thus, Directors’ & Officers’ Liability Insurance is like a lifesaver in such cases as the core purpose of a D&O policy is to provide financial protection to directors. Directors personal liability policy protects the directors against the consequences of actual or alleged ‘wrongful acts’ while acting within the scope of their professional duties.
The sum assured for Directors and Officers (D&O) insurance policies is calculated based on several factors, including the company’s size, industry, and potential risks. The insurer may also consider the insured individuals’ roles and responsibilities, past claims history, and the policy’s coverage limits and deductibles.
D&O policy offers protection to directors and officers when they are held liable by:
- Employees – for discrimination, harassment, breach of employment contract, defamation, misleading misrepresentation, wrongful employment practice, etc.
- Creditors – alleging that the director allowed the company to trade whilst knowing it could not pay its debts.
- Government agencies – directors and officers may be personally liable for breaches of hundreds of statutes.
- Competitors – Trade practices-related claims brought against the directors for misleading and deceptive type conduct.
- Shareholders – alleging that the directors mismanaged the operations of the company and its funds.
Conclusion
Directors and Officers liability insurance protects the past, present, and future directors and officers of profit or non-profit companies (Listed and Non-Listed). The D&O policy protects them from damages resulting from alleged or actual wrongful acts they may have committed in their positions. The policy provides protection in the event of any actual or alleged error, misstatement, omission, misleading statement, or breach of duty. Additionally, it provides indemnity to directors and officers for legal costs, damages, and expenses incurred, arising from claims brought against them personally – for acts in their executive capacity.
Additional Read: Why should start-ups need a D & O policy?
Get the right policy with SecureNow
To properly cover your directors and officers, you must buy the best D&O liability insurance policy. However, with so many general insurance companies offering a D&O insurance policy, it could be a difficult task to choose the right one. Let SecureNow help you make the right choice.
