What is the concept of estates in Directors and Officers liability insurance?
Directors and officers are the frontrunners or leaders of a company. They are the face of the company and work for the growth, development and especially the profitability of the company. During the course of their work, directors and officers have to take various decisions on all aspects of the business. They handle managerial as well as executive decisions and oversee the working of the company. They also trade on behalf of the company and enter into agreements and contracts.
Despite their best efforts towards discharging their duties, directors and officers might make errors or commit wrongful acts unintentionally. Due to these errors and mistakes, directors and officers can at times face lawsuits that might be filed by the employees, shareholders, customers, suppliers, stakeholders or other third parties related to the company.
These lawsuits are filed when any of these third parties suffer any type of loss which is seen as a direct result of the acts of directors and officers. The lawsuits can entail heavy legal expenses. Moreover, if a settlement is supposed to be made to third parties for their losses, it results in a major financial outflow. A directors and officers, or D&O liability policy covers these outflows and pays the claims on behalf of the company and its officers.
Besides covering the legal liability faced by the directors and officers, the D&O policy also covers the estates of the directors and officers. “Estates” here means the net worth of the individual which might be affected due to a lawsuit. When the directors and officers are sued and the organisation which they represent is unable to pay for the litigation expenses, the personal estate of the directors and officers is exposed to the expenses incurred. A directors and officers liability insurance policy protects this estate and pays for the claim.
Side A cover under the directors and officers policy specifically covers the estate of the directors and officers from being involved in paying the legal expenses and third party settlements. When the organisation fails to pay the defence costs of its directors and officers, the D&O policy steps in and handles the costs.
Furthermore, even if the director or officer, against whom a lawsuit is filed, dies, the policy also covers the legal representatives of the deceased officer and pays the claims incurred.
A lawsuit was filed against the director of a company for a breach of duty. Legal costs of Rs. 5 lakhs were incurred for defence, and the director was then asked to pay a settlement of Rs. 20 lakhs. The company filed for insolvency and was unable to pay the legal costs and settlement payable to the third parties. In the absence of a directors and officers liability policy, the director would have to pay Rs. 20 lakhs from his own estates.
However, if the directors and officers liability insurance policy is available, it would protect the estate of the director and pay the legal cost as well as the settlement. Moreover, if the director dies during the legal proceedings, the policy would extend to cover the director’s legal representatives as well.