Are there any real life examples where D&O has helped an organisation?
A Directors and Officers (D & O) Liability Policy covers the directors and officers of the company against any financial liability that they suffer in case they make errors or mistakes in their jobs. The directors and officers of an organisation are responsible to the shareholders, employees and customers of the company. However, if they make any error in discharging their duties, and are faced with a financial liability to compensate for such mistakes, a D & O policy would cover the compensation and the liability faced by the directors and officers.
The D&O policy covers the legal costs incurred by the company or its directors and officers in defending themselves and also pays for any compensation payable to the aggrieved party in settlements. The policy, therefore, proves to be very relevant in the corporate sector. Some examples wherein a D & O policy actually came into use are as follows –
Example 1 – an employee was made President of a small private limited company when he convinced the directors of the company that he was ideal for the job. However, under the new President’s leadership, the company’s revenues dwindled and the company’s financial position became weak. One of the shareholders of the company then sued the board of directors on behalf of the whole company naming them responsible for the weakened financial position. The shareholder argued that the board of directors did not make a good decision in choosing the President and that their action was not in the company’s best interests. The case was taken to court where the settlement was reached at USD 1.5 million and the legal fees incurred totalled INR 300,000. (Source: http://mcgrathinsurance.com/wp-content/uploads/2016/06/7-Real-Life-DO-Liability-Claims.pdf)
The company had a D & O policy in place which came into effect when the case was registered against the board of directors of the company. The policy was used to cover the defence costs as well as the settlement paid and thus spared the company as well as the board of directors the financial strain.
Example 2 – Back home, the case of TATA Sons is well-known. When Cyrus Mistry was ousted from the company, he reportedly made damaging statements about the company’s management. He mentioned that the management of TATA Motors was taking loss-making decisions simply based on emotional grounds. This statement triggered an uproar, as there was fear that these statements might harm the company’s market standing and lower the price of its shares causing substantial losses to the shareholders. The shareholders might then bring a class-action lawsuit against TATA Motors and its directors. (Source: https://timesofindia.indiatimes.com/business/india-business/Tata-row-may-trigger-insurance-claim/articleshow/55147208.cms)
This situation is also covered under a D & O Policy. TATA Sons and its subsidiaries are protected under different D & O policies which safeguard the financial interests of the company’s directors. So, any lawsuit against the directors and the financial implication if any, would be taken care of by the insurance cover.
A D & O Policy, therefore, finds relevance in small and large organisations, both international or domestic. It gives valuable coverage to the directors and officers of a company and also to the company as a whole and so the policy should be in place in every organisation.