Directors and Officers Liability Insurance

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A directors & officers (D&O) liability insurance plays a crucial role by providing coverage against various losses or damages which may arise against directors and officers of the company for wrongful acts done by them in their managerial capacity. In most cases, the insurer also covers defence costs and these are usually paid by around the time of the final verdict.

D&O insurance plays a crucial role by offering protection for claims which are brought up against officers, directors and employees for alleged breach of facts, duty or errors in their managerial ability.

As far as the cost of D&O insurance is concerned, it depends on a variety of factors, like the type of your business, the revenue of your company, your past claims if any along with your debts. The type of your industry or business helps in deciding the cost of the insurance. The cost varies as per the risks associated with your industry, with certain industries like communication, manufacturing, transportation, financial services etc. that are risky and usually opt for high coverage paying more in terms of premium. However usually it is seen that small or medium-sized enterprises usually have to bear similar D&O costs, irrespective of their industry. 

Young companies tend to create more liabilities for insurance companies due to their shorter financial history, new and inexperienced management and often imperfect policies. The insurer will charge a high premium if you fail to prove that your business is viable. As mentioned above, your debt flow would affect the D&O cost. This implies that if you have steady cash flow and viable debt management, you would have to pay less for your D&O insurance cover than a similar company with variable revenues, debt or cash flows. For them, the cost of this insurance policy would be higher if they can’t prove that their business is financially solid.

In any case, you should never lower your director and officer liability insurance cover just to save money on the premium. By this we mean that even if the cost of D&O insurance policy feels slightly high, you should pay it to get adequate coverage. If you save a few rupees on the premium by opting for a low insurance cover, you would be liable to pay much higher costs if there is a claim in the future. Further, there is a deductible which would also form part of the cost of D&O insurance policy. Here, the deductible is the pre-agreed amount that you would have to pay from your pocket before the insurance company settles the remaining claim amount.

It is always wise to compare D&O costs of various insurance companies before choosing an insurer. Further, as corporate insurance is a tricky field, you can always take the help of corporate insurance advisors like SecureNow and choose the right director & officers liability insurance as per your needs. In this way, you can also get the affordable rates on D&O insurance policy.

Case Study 

For the last ten years, J.S Software has been providing software services, including technical consulting, to clients who are situated in different parts of the world. Last year, J.S Software had to deal with a tough situation when one of its engineers, Rahul filed a case against the executive director of the company, Prakash Raj.

Rahul filed a complaint with Prakash alleging that his manager, Shravan was discriminating on racial grounds within the team. However, Prakash did not take action against Shravan, and eventually Rahul quit his job. Rahul then filed a case against Prakash, and the court gave a verdict against Prakash and J.S Software. They had to pay Rs 25 lakh to Rahul as compensation.

This case compelled J.S Software to wonder what they could have done to avoid such a situation.

Solution

J.S Software could have saved itself from monetary losses if the company had purchased Director & Officers (D&O) liability insurance policy. The policy would have paid compensation to Rahul and would have also paid the legal costs incurred by J.S Software in defending itself in the court. 

While deciding the cost of the D&O insurance policy, the insurer would have considered the number of years that the company had been in existence. Since J.S Software has been in existence since the last ten years during which it has enjoyed a steady cash flow, their premium for the insurance cover wouldn’t have been very high. Furthermore, by virtue of being in the relatively low-risk technology sector, the company would have been required to pay a low cost for directors and officers insurance.

The cost of D&O insurance would also include a certain portion of deductible which J.S Software would have to pay at the time of claim before the insurer would have settled the remaining claim amount.

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