Nearly every insurance policy specifies what it will cover and what it will not. It is essential to understand these to benefit fully from your insurance policy. Similarly, there are certain exclusions in a D&O liability policy.
Directors’ and Officers’ (D&O) liability insurance offers wide coverage for the directors and officers of a company for alleged wrongful acts committed while performing their professional duties. However, this extensive coverage in the D&O liability policy is not without exclusions.
What a D&O insurance policy does not cover
A contractual liability, one that is promised by the company to its client, does not fall under the cover granted by a D&O policy. For instance, say a company has a contract with a client which says that in the event of a breach of contract, the company will be liable for a compensation of Rs 50 lakh. In such a scenario, the D&O insurance provider is not liable to pay the compensation amount if a breach of contract occurs.
If a liability exists before the purchase of the D&O insurance, then the insurer will not cover it. For example, if a company receives a wrongful termination notice before it buys the insurance, then that is a known liability. The insurance policy will exclude such liability.
Prior or pending litigation or notice
The policy does not cover known circumstances or liabilities prior to the policy inception. Its cover usually starts from the inception date only. That is because D&O provides cover on the basis of when the claims occurred rather than when the claim was made.
A D&O policy typically does not cover cases where directors or officers make amendments in financial figures to secure a deal or are convicted of any other crime.
Misuse of company funds
Insurance cover is not available if management makes or receives any illegal remunerations or to misrepresents the company’s funds.
Directors/officers may perform deliberate dishonest or fraudulent acts out of personal motives. The policy will not cover such acts.
Claims covered by other insurance
A company usually has a broad insurance portfolio. So, it is crucial to check whether the case falls within the domain of any other insurance policy, such as bodily injury or property damage claims. In such cases, the D&O policy is not applicable. Buying all liability covers from one insurer increases the possibility of the insurer honoring the claim.
These include pollution claims, war and radioactivity claims, workmen compensation, criminal activity, bankruptcy, theft of intellectual property, and any violation of the statute, rule of law.
Essential in spite of exclusions
In order to deal with reputational crises and financial losses, it is vital to avail of D&O liability insurance. This provides strong support for corporate governance. The policy covers necessary defense costs arising out of wrongful acts up to the specified sum insured. Such acts include errors, misleading statements, omission or neglect, or breach of duty. It will cover individuals for personal loss when the company cannot. Alternatively, it will provide cover when corporate law makes the director/officer personally liable for their actions. In fact, investors usually place the condition of D&O liability insurance for funding a company. Thus, it is always advisable to buy a D&O liability insurance policy and add value to your corporate risk management and avail a shield of financial protection against lawsuits.