The role of directors
The directors of an organization make efforts toward the growth and development of the company. They are liable to the stakeholders, business vendors, suppliers, creditors, government, and even to the business. Normally, directors and managerial officers have to make important decisions for the organization’s benefit. These decisions impact third parties too. Directors buy D&O policy because they have a vested interest in the growth and profitability of the business. If, however, directors commit mistakes due to errors, negligence, or omission, such mistakes can impact third parties as well as the organization.
The onus of third parties’ financial loss rests with the directors or officers. A third party can hold directors personally liable for financial loss. The personal estate of the directors might come under strain due to such responsibility. This is where a director’s and officer’s liability insurance policy comes to the rescue of directors.
What directors’ and officers’ insurance covers
Director’s and officer’s (D&O) liability insurance policy covers the personal liability of directors as well as the organization’s financial loss. Though the director’s insurance policy protects the financial liabilities of the directors, they cannot buy it directly. The organization needs to invest in the D&O insurance policy on behalf of its directors. Let’s understand why.
Many third-party lawsuits name the company and also the directors in it. This is because the directors represent the organization, which is a separate legal entity. When third parties file a loss claim, they do not file it against the directors. They file it against the organization which then indemnifies its directors for the financial losses. So, if any settlement is payable to third parties, the organization pays the settlement. And, even if the organization files for bankruptcy or becomes insolvent, the D&O liability insurance policy indemnifies the directors for the settlement payable to third parties. Since the directors are the face of the organization the company needs to invest in D&O policy to protect its directors from financial liabilities.
There are, usually, multiple directors in an organization. Often, multiple directors are named in a liability claim. Buying independent policies for each director is not feasible. It becomes a problem during the claim to find the liability of each director. A director’s insurance policy covers all the directors under a single plan. The policy collectively protects all directors against liabilities. Whichever director is named in the lawsuit is covered by the D&O liability insurance policy.
Can directors buy D&O policies for themselves?
Directors themselves do not buy a D&O policy. The organization buys it on behalf of its directors and covers all the important directors and officers.
