Directors and Officers Liability Insurance (D&O) covers the cost of legal defense of directors, even in their individual capacity, when the company is unable to defend them. The D&O cover applies to former, present, and future members of the board of directors or any employee performing a managerial role.
Usually, the directors and officers liability policy covers the following:
- Management Liability
- Management indemnification
- Non-Profit Outside Directorship Liability
- Estates and legal representatives of incapacitated or deceased insured individuals covered
- Spousal Liability extension
- Cover for the creation or acquisition of new Subsidiary companies (effective from the date of acquisition or creation)
The D&O policy offers the following coverages:
- It covers any loss or damage that the company may incur because of actions mistakenly taken in the individual capacity as directors and officers under the Memorandum and Articles of Association
- It includes loss or damage arising from claims made against directors and officers for any wrongful act done in their official capacity
- It covers legal expenditure incurred with the written consent of the insurance companies arising out of the prosecution of director or officer at any investigation, enquiry or other proceedings by the authority empowered to do so
- It covers expenses incurred by the company’s shareholders in pursuance of a claim against managerial personnel for which the insurance company is legally obliged to pay, as per the court’s direction
- It provides indemnity to the legal heirs or legal representatives of the director/officer if the director or officer becomes insolvent
Real Case: TATA vs. Mistry 2016
The sacking of Cyrus Mistry as the chairman of Tata Group and its fallout with the company may now trigger a claim under the Directors and Officers Liability Insurance (D&O) policy which the company had purchased in 2013.
Tata Sons has a D&O cover offering over $50 million coverage. Besides offering cover to the directors of the company, the policy also acts as a cover for a group of companies.
The ousted Mistry raised issues of impairment and made a statement that Tata Motors was taking various loss-making decisions on emotional grounds. As the company is also listed in the USA, the risks of investor actions are very high there, and in the case of proceedings in the USA, the defense cost will run into millions of dollars. In that situation, the D&O policy will help. The policy will cover the costs incurred by the company in defending itself in the court.
Similarly, if due to any action of the board, there is a drop in share prices and erosion of market cap, which results in loss to shareholders, there is a high possibility that they may take an action lawsuit against the company or the individual directors.
In this case, the D&O policy will safeguard the company and its directors. Apart from the shareholder action, the cover could also be activated if an ousted board member brings a retaliatory suit against other board members.