Directors’ and officers’ (D&O) liability insurance forms an integral part of the risk-management strategies of most organisations. In contrast, those that do not buy this insurance could end up paying hefty amounts in legal costs and settlements. It is possible that these organisations do not invest in D&O insurance because they are unaware of it. This post seeks to clarify the features and benefits of the D&O liability insurance policy.
Who a D&O policy can cover?
Employees in management positions or performing managerial roles in an organisation can avail the features and benefits of the D&O liability insurance policy. Indeed, coverage is available for past and present managers of the company for claims made on a prospective or retrospective basis.
What does it cover?
A D&O policy covers
- any loss or damage that a company incurs because of erroneous actions taken in individual capacity as directors and officers under the memorandum and articles of association;
- loss or damage arising from claims made against directors and officers for any wrongful act performed in their official capacity;
- legal expenditure incurred with the written consent of the insurance company arising out of the prosecution of directors and officers at any investigation, enquiry, or another proceeding;
- expenses incurred by the company’s shareholders in pursuance of a claim against managerial personnel, which the insurance company is legally obliged to pay;
- indemnity to legal heirs or legal representatives if directors and officers become insolvent.
How does the policy offer coverage?
The coverage under a D&O policy is offered under Side A, Side B, and Side C.
If the organisation is unable to compensate third parties for financial losses, the directors and officers become personally responsible for these. Side A covers this responsibility and pays third party claims on behalf of the company.
If the company incurs third-party claims on behalf of its directors and officers, Side B cover indemnifies the company for the loss.
Companies listed on the stock exchange might suffer liabilities for the securities they list. Side C covers such liabilities.
Read about these three types of coverage in detail here.
What does it not cover?
Although the D&O liability insurance policy provides inclusive coverage, it has policy exclusions as well. Common exclusions include:
- fraud or fraudulent activities
- dishonesty and embezzlement
- misappropriation of the company’s profits
- claims incurred prior to buying the policy
- claims suffered due to war, nuclear peril, copyright infringement, etc.
- illegal activities and violation of law or statutes.
Benefits of a D&O liability policy
Comprehensive insurance cover
The decisions of a company’s directors can impact various stakeholders, be it clients, end-users, suppliers, shareholders, or even employees. If a company has D&O insurance, it gets coverage benefits for any compensation cost awarded as per the policy terms. If relevant, one can even opt for a D&O liability insurance policy that covers lawsuits arising due to another company where your directors are serving as nominee directors.
Multinational expansion of a business comes with increased responsibilities and risks. Many Indian companies have today expanded their operations to cover multiple nations outside our borders. Then, if they gain shareholders abroad, the impact of D&O decisions is experienced overseas. If a shareholder files a lawsuit in another country, things may become complicated. D&O insurance policies that provide worldwide coverage for both territory and jurisdiction come in handy in such situations.
All-inclusive defence cost coverage
Dealing with court cases filed against the directors of your company can cost you large amounts of money. These expenses include the fees paid to defence lawyers or to regulatory authorities for investigation or to PR firms for reputation management. A significant benefit of buying a D&O liability insurance policy is that the insurer will pay for these defence costs. In addition to primary coverage benefits, you can choose add-on covers to include PR costs, investigation costs, and other such expenses. This might increase premiums slightly but the financial relief is well worth the price.