Directors and Officers Liability Insurance

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A contractual staff member is an employee who works for the employer under a contract. A contractual staff member is hired for a particular job and is offered a specific payment for the job that he or she is doing. This is how a contractual staff differs from the permanent employee.

A person performing his duties on contract does not become a regular addition to the rolls of the company as s/he is hired only for performing a specific duty or function on a contractual basis.

A director & officer liability Insurance policy offers to cover not just the directors and officers employed by the organization itself, but also the directors and officers of their subsidiary companies, and non-executive or independent directors who are engaged on a contractual basis. Hence the consulting directors or officers who are appointed on contractual basis are  covered as contractual staff in a liability insurance policy.

Case Study: 1

Y.R. Internationals, an information technology company was operating in Daman. It had a total of thirty employees, three permanent directors and one individual director who was appointed on a consulting basis.

As the profit of the company had been on a decline since the last two quarters, the company opted to employ cost cutting measures. One of the cost-cutting measures employed by the directors of Y.R Internationals was to reduce the number of staff. In total, seven employees were relieved of their duty due to the measures taken by the directors.

Additional Read: What is covered under a directors and officers Liability Insurance Policy?

Upon dismissal, one of the female employees filed a claim against the consulting director stating that her dismissal was unfair and was based on gender inequality.

Upon receiving the notice against the consulting director, the company immediately contacted its Insurance providers. Y.R International had bought a Directors & Officers liability insurance (D&O) policy from them. The D&O policy covered the directors and officers of the firm against the mentioned losses in the policy. But it also offered to cover the contractual staff. The consulting director against whom the suit was filed was a contractual staff member of Y.R. Internationals as he was not a permanent director. Since the policy also covered the contractual staff, the independent consulting director was protected against the claim and was able to cover the losses.

Case Study: 2

Sumit, who lived in Mumbai was appointed  a consulting director of a property management company. In the initial years of business, the company was doing well and was able to generate a considerable return on its investments. However, after some years the business for the firm started declining. The number of contracts that the company got was not able to generate positive numbers for the business.

The company struggled to maintain its cash flows, as the cash coming in was lesser than the cash being spent by the business.

Despite several measures that were adopted by the property management company, its bottom line numbers i.e. the profits in the income statement were continually declining. Finally, a drastic measure was taken by the directors to sell the company to a prospective buyer. The company was eventually sold.

However, a minority shareholder of the property management company filed a legal action against Sumit (the consulting director), stating that he had failed to obtain a fair value for the sale of the company and demanded a payment to cover for the shortfall.

The property management company had secured all its directors and officers with the help of a director & officer liability Insurance policy. Sumit was also able to secure himself against the claim made by the minority shareholder as the policy also provided protection for the contractual staff. Since Sumit was a consulting director and not a permanent director, he was categorized as a contractual staff. The insurers were able to settle the claim against Sumit successfully.

Additional Read: Who are covered under Directors & Officers (D&O) Liability Insurance Policy?