A director and officer liability insurance, also known as D&O policy, is a liability insurance which offers coverage for the personal liability of directors and officers which may arise due to wrongful acts done by them in their managerial capacity. The defence costs are covered and payable in advance under this policy before the judgement is delivered.
The Directors & officer liability insurance policy gives protection for claims which are brought against directors, employees and officers of the company due to an alleged breach of duty or neglect or misstatements or errors which may arise in their managerial ability. Such actions could be brought up by employers, customers, regulators or even shareholders.
The D&O insurance premium is computed on the basis of the size of the company and the coverage offered. In case additional covers are required by the company, like ransom, abduction, etc. it would have to pay extra premiums for the same.
Case Study: 1
When Ruby complained to Rajiv, the managing director of L.J Associates, that her manager Jivesh was mentally harassing her, Rajiv assured Ruby that he would look into the matter. However, he got so busy with work that he forgot about Ruby’s complaint and put off any investigation. One more time, Ruby complained – and this time in writing. However, again Rajiv did not take any action.
Ruby quit and threatened to sue L.J Associates. Now, faced with a possible lawsuit, Rajiv investigated the case and found Ruby’s allegations were true. He fired Jivesh. But, that did not close the case. Ruby filed a case against Rajiv and L.J Associates and its board of directors for allowing mental harassment in the workplace and failing to take any action.
Here, Ruby alleged that she complained to Rajiv about the harassment, but still he did not pay attention, and as a result, she had to quit.
The case reached the court, where the decision was given in favour of Ruby. The court found that Rajiv did not act timely on the application of Ruby and due to which she not only suffered mental trauma but also had to quit the job.
The court asked Rajiv to pay hefty compensation to Ruby. As L.J Associates had purchased a Director & Officers Liability Insurance for all its directors, so when the company received the notice of the legal suit, it informed its insurance company who asked for the complete account of the incident and agreed to settle the claim. The claim fell under the purview of Directors and Officers Liability Insurance.
As the court had asked to pay Rs 30 lakh as compensation to Ruby, the insurer paid the same amount to her on behalf of L.J Associates. Along with this, as the company had to incur legal expenses in defending itself in the court, the insurer covered the legal expenses as well. In this case, the insurance offered the coverage in the following two ways-
- The insurer paid compensation to Ruby
- The insurer covered expenses incurred by L.J Associates in defending itself in the court
Case Study: 2
In 2016, Tata Group sacked its chairman, Cyrus Mistry after the fallout. However, this fall out had triggered a claim under Directors and Officers Liability Insurance policy which the company brought in 2013.
Tata Group bought a D&O cover with over $50 million coverage. In addition to offering financial cover to all the directors of the company, the policy also helped in covering a series of a group of companies.
As the ousted Mistry made some derogatory comments about the company and said that Tata Motors was taking some loss-making decisions. These comments could pose a serious threat to the brand value of the company. Moreover, as the company was also listed in the USA, the company also feared the risks of actions which could arise due to its investor’s action.
Tata Group was hopeful that if a claim arose, the D&O insurance policy would cover their expenses, including compensation and legal expenses.