The directors and officers of a company put in their best efforts to ensure the organization’s growth and profitability. However, if they make any errors when discharging their duties or if they are negligent, third parties might suffer a financial loss. If attributed the such financial loss to the actions of the directors and officers, a third-party liability occurs. The directors and officers become personally responsible to shoulder this responsibility and the organization might also take on the responsibility on their behalf. Let’s look into some important features of D&O insurance.
Third-party liabilities might result in considerable financial outflows. This is where a D&O policy becomes effective. The D&O insurance policy benefits include coverage against third-party liability arising out of the actions of the company’s directors and officers.
Some of the important features of the D&O liability insurance plan are as follows –
Side A, B, and C coverage
The coverage under a D&O policy is offered under three sections – Side A, Side B, and Side C. Here’s what each section covers –
- Side A – If the organization is unable to compensate third parties for the financial loss caused, the directors and officers become personally responsible for the same. And Side A covers this responsibility and pays third-party claims on behalf of the company
- Side B – If the company incurs third-party claims on behalf of its directors and officers, Side B cover indemnifies the company for the loss suffered.
- Side C – Companies that are listed on the stock exchange might suffer liabilities for the securities listed by them. So, Side C covers such liabilities.
Expenses covered by the plan
A D&O insurance policy covers the settlement payable to third parties for the financial loss that they have suffered. Moreover, the plan also covers the legal costs incurred in defending the lawsuit filed against the organization or its employees by third parties.
Benefits of directors & officers liability insurance
By covering the expenses incurred on third-party settlements and legal costs, the D & O policy provides much-needed financial relief, both to the organization as well as to the employees. Directors and officers work with autonomy in discharging their duties without worrying about the financial aspect of any mistake that they might commit. The organization can also maintain its profitability without incurring a considerable loss in case of a third-party lawsuit. Thus, the D & O policy benefits both the organization and its employees and is important.
Though the directors’ & officers’ liability insurance policy provides inclusive coverage, there are policy exclusions as well. You should know these exclusions to understand the exact extent of the coverage. Common exclusions include the following –
- Frauds 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 perils, copyright infringement, etc.
- Illegal activities and violation of law or statutes
Who can be covered?
Employees in management positions or performing managerial roles in the organization can be covered under the D & O policy. Coverage is available for past, present as well as future managers of the company for claims made on a prospective or retrospective basis.
So, when you buy D&O insurance, know the salient features of the plan. Understand the plan’s coverage and exclusions and then buy the policy.