Complete guide on Directors and Officers liability insurance 26th October 2022
Directors and officers of a company are vulnerable to being sued by several disgruntled entities, such as shareholders, employees, vendors, creditors, investors, etc., due to wrongful acts or misdeeds while managing the company. Directors and Officers (D & O) liability insurance protect against such lawsuits. The legal environment is complex, and such insurance helps to cover the high cost of lawsuits.
The policy protects the personal assets of the Directors and their spouses. It also protects the company by covering the legal fees, settlement costs, and any other costs that the company might incur while defending the lawsuit.
Reason for suing:
The directors and officers can be sued for several reasons while performing their company duties. Some of the common reasons are:
● Misuse of company assets and funds
● Misrepresentation
● Financial loss to a stakeholder due to a breach of fiduciary duty
● Errors in reporting
● Violation or theft of Intellectual Property Rights
● Lack of corporate governance
● Poaching of customers/ employees of the competitor
What acts are not covered under the policy?
Such policies generally do not cover acts of fraud, criminal activities, and illegal profits made by the directors and officers while performing their duty and acting on behalf of the company.
The process:
An unhappy person or company may decide to sue the director or officer of the company in court if they fail to perform their duty. This will generally happen when someone suffers losses due to their conduct or action.
The company's manager and legal/ risk department will be informed of the case, which they will forward to the insurer. The insurer will cover the claim if it meets all the terms and conditions of coverage. The defence costs, as well as the financial losses, will also be covered if they lose the case.
Exceptions:
The insurer will deny settling the claim if the company does not disclose material information or provides inaccurate facts.
Most of such policies contain a clause known as 'insured vs. insured exclusion'. Under this clause, the insurer will not settle a claim if the directors and officers sue the company. This ensures that the company cannot profit from deceit or conspiracy.
Coverage:
A Directors and Officers liability insurance policy protects the personal assets of the directors and officers in case a stakeholder or a third party sues them. Their company may not be in a position to indemnify them if the claim amount is big and it does not have the required resources. In such a situation, the insurer will pay the litigation costs and protect the personal assets of those involved.
The insurer will reimburse the company for the legal costs if it has already granted indemnification to its director or officer. Such a policy provides coverage to the company, too, in case it is sued.
These policies usually cover the company's present, past, and future directors, managers, and officers.
The dilemmas:
This is a typical type of insurance coverage and generally comes with a long list of terms and conditions. Hence, it brings with it a lot of questions and dilemmas for the buyer. The company has to decide how much should be on the cover, what deeds of its employees are included under the cover and what is excluded, whether it is a good option for a Small-to-medium sized company (SME), etc.
A Directors and Officers liability insurance policy has become very common with big multinationals in India. Every sector is opening up to such policies- public, private, or not-for-profit. This is why public liability insurance India is gaining importance. Policies are being tailored for small and medium enterprises as well because of their huge number in India.
The cost of litigation is very high, and one court case can cripple an organisation's financial resources. However, the penetration is still low at present, and a huge potential exists in this sector.
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Disclaimer: The information provided above is for illustrative purposes only. To get more details, please refer to policy wordings and prospectus before purchasing a policy.