Directors and officers are often the face of a company and work for its growth and profitability. However, during the course of their work, they might have to take decisions that might end up being wrong. Such errors and mistakes might attract lawsuits from employees, shareholders, customers, suppliers, stakeholders, or others.
Lawsuits can entail heavy legal expenses. Moreover, if a settlement has to be made to third parties for their losses, it could result in a major financial outflow. A directors’ and officers’ (D&O) liability policy covers these outflows and pays the claims on behalf of the company and its officers.
Protection for estates, heirs, etc.
Side A cover under a D&O liability extends to the estate, heirs, legal representatives, or assignees of a director or officer in case they pass away or are incapacitated. If someone sues directors or officers, and the organisation they represent cannot pay, their personal estate or heirs may be exposed to the expenses. In such cases, D&O liability insurance will cover financial losses that arise from or due to any claim made against a director’s or officer’s
- lawful spouse or domestic partner
- estates, heirs, or legal representatives
Additional Read: What is covered under a directors and officers Liability Insurance Policy?
However, the insurer will do so only if the relevant individuals follow all terms and conditions. This includes requirements such as keeping the insurer informed of potential litigation, disclosing relevant cases, or informing insurers of a material shareholding change.
Case study: Cover for legal heir
MK Engineering Company signed an agreement with LJ Shipping Company to transport its goods. To facilitate the transport, it shared some business information with LJ Shipping.
Sometime later, MK Engineering alleged that LJ Shipping’s owner and director, Jayant Rao, had breached the confidentiality clause of the agreement and shared sensitive information with its rival. MK Engineering claimed it had suffered huge losses as a result. It revoked the agreement and brought legal action against Rao.
Although Rao denied any wrongdoing, the case went to court. LJ Shipping had a D&O liability insurance policy and informed the insurer about the case. The court found that Rao had unintentionally disclosed sensitive information that caused financial loss to MK Engineering. Therefore, it ordered LJ Shipping to pay compensation to the engineering company.
Unfortunately, while the case was still in court, Rao met with an accident and died. Thereafter, his son, who was also a director, became the new CEO. The insurance company agreed to settle the claim, even though the main policyholder, Jayant Rao, was dead. Since his son was his legal heir, the insurer covered the legal costs and paid the compensation.
Case study: Cover for partner
Anil and Mahesh started a software company in 2009. They quickly developed a large base of clients throughout India.
Recently, they landed a project to develop an attendance software for LK Manufacturers & Sons. Anil led a team of seven and completed the project before the deadline. Then, they presented the software to the manufacturing company.
LK Manufacturers tested the software before delivery. But soon after, they found that it had some discrepancies. That is, the software marked even absentees present. As a result, the company had to check attendance manually. Anil refused to check the software, since LK Manufacturers had gone to another vendor to check it before approaching him.
The manufacturers filed a case against Anil. Luckily, he had a D&O liability insurance and informed the insurer. In court, the judge ruled in favour of LK Manufacturers & Sons and asked Anil to pay them Rs 50 lakh.
Unfortunately, while the case was ongoing, Anil met with a fatal accident. However, the D&O liability insurance provider still paid the compensation and the legal charges. Although the policyholder, Anil, had passed away, the D&O insurance policy extended cover to Mahesh, who was Anil’s partner in the company.
For more information on the cover available under a D&O liability insurance, drop us a mail at email@example.com or give us a call at 96966 83999.