Directors and Officers Liability Insurance

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Exclusions are a part of practically every insurance policy and it is essential to understand and update yourself on various “ins and outs” of your policy. Directors and Officers liability insurance offers wide coverage for the directors and officers of the company for alleged wrongful acts whilst performing their duties for the company. Getting this policy however does not provide a green signal for acts of negligence or bad behaviour as it comes with various exclusions.

D&O Insurance Policy Exclusions

  1. Dishonesty: Directors or officers allowing amendments in financial figures in order to secure a deal.
  2. Misuse of company’s funds: Illegal remunerations or misrepresentation of company’s funds performed within the scope of managerial duties would not be covered.
  3. Personal Profit: Any deliberate dishonest or fraudulent acts performed out of personal motives will not be covered under this policy.
  4. Prior or pending litigation or notice: All  known circumstances or liabilities prior to the policy inception are excluded in this policy. The policy will start covering claim cases from the inception date only.
  5. Claims covered by other insurance: A company usually has a broad insurance portfolio so it is crucial to check whether the case is not falling within the domain of any other insurance policy such as bodily injury or property damage claims.
  6. Standard Exclusions: It comprises pollution claims, war and radioactivity claims, workmen compensation, criminal activity, bankruptcy, theft of intellectual property and any violation of the statute, rule of law.

The directors and officers liability insurance policy will cover necessary defence costs arising out of wrongful acts such as errors, misleading statements, acts or omission or neglect or breach of duty, up to the specified sum insured. As a Director or Officer, you are personally liable for your actions so any kind of error or wrongful act except the list of exclusions is covered under this policy. It will cover the individual for personal loss when the company cannot, or when corporate law makes you personally liable for your actions as a Director or Officer.

Case Study:

BCD Limited has availed Directors & Officer Liability Insurance. They have  a contract with one of their clients and in the formal documentation, it is specifically mentioned that occurrence of the breach of contract will make the company liable for paying compensation of Rs. 50 lacs. Under such a scenario insurance companies are not liable to pay the compensation amount if the breach of contract occurs. Since this liability is a known liability promised by the company to its client so it will not be covered under this policy.

In order to deal with the reputational crisis and financial losses, it is pivotal to avail Directors and Officers Liability insurance as it provides a strong support for corporate governance. This policy covers all the defence fees arising out of litigation so it acts a risk bearer for contingencies. It is an important requisite as investors usually place the condition of having D&O liability insurance policy for funding your company. The policy offers dual benefits of protecting directors from serious exposures of wrongful acts and attracting investors for funding. It is always advisable to buy this insurance policy and add value to your corporate risk management and avail a shield of financial protection against lawsuits.