Directors and Officers Liability
What is Director and Officer Management Liability Insurance?
An officer or director’s liability insurance policy protects individuals from personal losses if they are sued due to their service as an officer or director of a business. As a result of such a lawsuit, the organisation might also have to pay legal fees and other costs.
D&O insurance applies to anyone who serves as a director or an officer of a for-profit business or non-profit organisation. A D&O insurance policy insures against personal losses, and it can also help reimburse a business or non-profit for the legal fees or other costs incurred in defending such individuals against lawsuits.
D&O insurance claims are paid to directors and officers of a company or organisation for losses or reimbursement of defence costs if legal action is brought against them. Such coverage can also extend to criminal and regulatory investigations or trial defence costs. The actions against directors and officers are often brought simultaneously in civil and criminal courts.
What is covered?
A negligent act
Infringement of trust
Fraudulent Representation
Costs and expenses associated with defence
Directors and officers of the company awarded compensatory damages
An act of fiduciary responsibility or an act of authority breached
A default that is unlawful, including an out-of-court settlement
What is not covered?
Terrorism and war
Claims for bodily injury
Liability related to asbestos
Litigation pending or prior to
Substantial shareholder actions
Claims related to Professional Services
The claim arising out of a securities offering
Damage to property resulting in a loss
Insured Persons are liable if they hold a position as trustees for employee benefits
Any Insured Person who holds a position outside the company may be subject to liability
Insured Person(s)’s unscrupulous behaviour is the cause of a claim
What is additionally covered?
- Slander and libel
- The Employer’s Liability Act
- Official investigations and enquiries
- An earlier offering of securities
- The right to intellectual property
- The blanket subsidiary cover
- Severability and Non-Imputation Additional notification period
What can be covered on payment of extra premium?
- Positions outside the company
- Liability for current and future prospectus
- Critical event protection for entities
- Pollution
- Joint Venture Liability
- Entity Protection for Securities Claims
- Entity Protection for Employment Related Matters
What are type of coverages?
Three types of agreements are typically insured under a D&O policy. Generally, they are referred to as Side A, Side B, and Side C.
Side A coverage
When a company refuses or is not financially able to indemnify directors and officers, Side A coverage kicks in. A bankruptcy declaration, for instance, can cause this. Side A coverage protects the personal assets of the individual officer, not the company.
Side B coverage
In the event that an indemnification is granted, Side B coverage covers the losses incurred by directors and officers. Legal expenses will be reimbursed by the policy in this case. While the company's corporate assets are at risk under Side B coverage, it is the company that is insured.
Side C coverage
The Side C coverage, also referred to as "entity coverage," covers the corporation as a whole. In the case of Side C coverage, the company is insured, and its corporate assets are at risk.
Business model characteristics, needs, history, and financial picture ultimately determine what coverage a company selects.
Special considerations
Depending on the risk and the nature of an organisation, D&O policies can take different forms. The best insurance company for this specialised field is one that has deep experience in it. It is usually the organisation that purchases policies rather than the individuals themselves to cover a group of people.
In a case of misrepresentation, the insurer may refrain from paying the claim if the company fails to disclose material information or gives inaccurate information knowingly.
The “severability clause” may provide protection against such an event by preventing misconduct by one insured from having an adverse effect on insurance for other insureds; however, this may not be the case in certain jurisdictions.
Fraud, criminal activity, and illegal profits are generally excluded from insurance policies despite their ability to cover a variety of hazards. In addition, most policies contain “insured vs. insured” clauses, which prevent payments when directors and officers sue the company. In this way, deception and conspiracy are prevented from enriching the company.
Why director and officer management liability insurance?
Directors and Officers Liability Insurance is necessary because of “The expansion of global footprints of Indian companies, Stringent and Complex Regulatory Environment, increased shareholder litigation”.
As per the Newly introduced Company Act 2013, the Director duties are defined as:
- The articles of association (AOA) of a company govern the conduct of its directors.
- It is the director’s responsibility to make decisions in the best interests of the company and its stakeholders, as well as to promote the company’s objectives.
- Company directors must exercise independent judgement and exercise due care, skill, and diligence in performing their duties.
- Directors of companies must avoid involvement in situations where they have a direct, indirect, or possibly conflicting interest with those of the company.
- The directors of a company must not benefit or gain any undue advantage for themselves, their families, partners or associates, and if they are found to have done so, they shall be liable for paying the company an amount equal to the undue gain.
- Company directors may not assign their office, and any assignment made in this manner is null and void.
Who may claim against the policy?
Shareholders
If a director or officer commits a wrongful act or omission, the individual shareholder can bring a personal action against the director or officer
Employees
discrimination, harassment, and mismanagement of superannuation funds, among other employment related matters
Regulatory Authorities
The SEBI, the Revenue Department, and other regulatory bodies conduct investigations, inquiries, or prosecutions.
Customers
In the event that advertising material is misleading or unfairly advertised
Creditors
For continuing to trade while the company is insolvent. In addition, creditors may sue the company for illegal dividend distributions if dividends have been distributed to shareholders.
Competitors
If competing products are unfairly compared to the company's product in defamatory or misleading advertising. Civil actions can also be brought by competitors whose copyrights have been violated.
FAQs
Small businesses aren’t immune to costly lawsuits. There is a tendency to assume that lawsuits and fines are only triggered by disgruntled shareholders. There is no doubt that high-profile lawsuits against large public companies follow this pattern. Third parties, such as customers and vendors, often file the most damaging lawsuits against private companies. Because small companies lack the financial muscle of larger companies, they might be especially vulnerable to a potentially damaging lawsuit.
Companies’ size, industry, risk appetite, financial status, revenue, and claims history can influence the cost of D&O insurance. Businesses with a long operating history are likely to pay less than those with a shorter operating history.
Your company’s requirements and its budget will determine what type of D&O insurance you choose. We’ll take a closer look at a few key points—should the policy only cover managers (Side A) or should it cover the entire organisation (Side B and Side C)? What is the right amount of coverage? How does your company, in particular, deal with D&O risks?
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