Directors and Officers Liability Insurance

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A director or officer is typically at a senior position in any organisation, and their role goes beyond just developing strategy and managing the performance of the company. These individuals represent the company and create an impact on its image and goodwill.

While serving on the board, they are expected to act diligently and exercise all their professional skills for the benefit of the organisation. However, there are several instances when the decisions of these executives have caused loss or damage to a third-party and have led to allegations. In such a situation, the director or officer can be personally held liable. Further, fighting a legal battle can be both time and money intensive.

A Director & Officer Liability Insurance (D&O) compensates for the damages and defense costs payable by corporate professionals. In some situations, the policy also offers coverage to the estate, heirs, legal representatives or assigns of a policyholder in case of death or incapacity of the Insured.

This implies that the D&O Liability Insurance will cover financial losses that arise from or due to the consequence of any claim made against:

  • The lawful spouse or domestic partner of the policyholder
  • Estates, heirs or legal representative of the policyholder; arising solely out of a wrongful act by insured and made solely against such person, estate or its respective capacity as the spouse, estate, heir or legal representative of the insured

However, the insurer will cover the estate and legal representative only if they observe all the terms and conditions.

Case: 1

L.J Shipping Company signed an agreement with M.K Engineering Company. To facilitate the hassle-free movement of goods, the engineering company shared all the information about its items and business plans to the shipping company.

It was later alleged that one of its directors, Jayant Rao, who was also the owner, had breached the confidentiality clause of the agreement and shared all the sensitive information about the engineering company with its rival. As a result, the engineering company suffered huge losses.

When the investigation was conducted, it was found that the director of the shipping company unintentionally shared sensitive information about the engineering company.

However, due to this, the agreement was revoked, and a legal action was commenced against the director of the shipping company. On the other hand, the director denied any wrongdoing.

The case went to the court. But the shipping company had a Director & Officer Liability Insurance policy; it informed the insurer about the case. Unfortunately, when the case was still in the court, the director met with an accident and died. Now his son, who was also one of the directors, became the new CEO.

In this case, the court found that Jayant Rao unintentionally disclosed information, however, it caused financial loss to the engineering company, and therefore, the shipping company was asked to pay compensation to the other party.

In this case, the D&O Liability Insurance Company agreed to settle the claim, even when the main policyholder, Jayant Rao, was dead.

As now his son was his legal heir, the insurer defended him in the court and also paid compensation and court fees.

As you can see, the policyholder died, however, the insurer covered his legal representative and offered the compensation in the same way it would have done if Jayant was alive.

Case: 2

After working for seven years in the corporate world, Anil and Mahesh started a software company in 2009. In a short span of time, the company developed a large base of clients throughout India. In their capacity as directors, both Anil and Mahesh were steadily working hard towards the company’s success.

Last year, they got a project to develop an attendance software system for a manufacturing firm, L.K Manufacturers & Sons. Under the leadership of Anil, a team of seven people started working diligently on the software for 45 days. It was the sheer hard work of Anil and his team that the project got completed one week before the deadline.

Ajay presented the software to L.K Manufacturers & Sons. However, even though the software was tested by L.K Manufacturers & Sons before taking its delivery, it was not later found fit for the company’s use.

The software had some discrepancies like it was not properly maintaining the database of absent employees. As a result, even absentees were marked present, and the company had to check the attendance manually.

When the matter was reported to Anil, he refused to check the attendance software and put the entire blame on L.K Manufacturers & Sons as instead of approaching them directly, they first got it checked from the other vendor.

L.K Manufacturers & Sons filed a case against Anil, who luckily had a Director & Officer Liability Insurance. Anil informed the insurer, and the case reached the court. Unfortunately, when the case was under trial, Anil met with a tragic accident which killed him on the spot.

The judge gave its verdict in favour of L.K Manufacturers & Sons and held Anil responsible for the software even when the plaintiff did not approach him first. Anil was asked to pay Rs 50 lakh to the other party.

In this case, the D&O Liability Insurance company came forward and paid the compensation along with legal charges involved in the case.

Though the policyholder, in this case, was Anil, who died before the verdict; the D&O insurance policy extended its cover to Mahesh, who was also the partner in the company. The insurer paid the compensation, in the same manner, it would have done if Anil was alive.