Director’s and Officer’s Liability Insurance
Changes in the business landscape, while presenting myriad opportunities, are also increasing risks to companies world over. A Company does not make decisions. The Board of directors, officers and managers do on its behalf. In making these decisions the directors and officers not only place the company at risk from actions by an aggrieved party, but also place themselves personally at risk. Any breach or non-performance in the duties can result in claims against the companies and/or its directors by reason of any wrongful act, actual or alleged, in their respective capacity.
A director’s personal liability is unlimited placing all his personal assets at risk. Unlike the Company, he cannot take shelter under limited liability. Directors are jointly and severally liable. It is here a Directors and Officers liability insurance (D&O insurance) will be useful, as it provides indemnity to them, should they face any action in the form of a suit or investigation.
Recent changes in Companies Act and other statutes aimed at bringing about better corporate governance, have cast a lot more responsibility and accountability on the part of the directors.
What is covered under the Director’s and Officer’s Insurance Policy?
The primary purpose of Directors & Officers Liability insurance is to protect the personal assets of the individual director or officer. This insurance policy covers the following:
- Legal costs in defending allegations or suits brought against them alleging wrongful acts.
- Any damage awarded to the claimants against the directors and officers, including out of court settlements.
Sources/ Causes of Claims
Claims may be filed by any stakeholders like Regulators/ Government, Shareholders, Employees, Creditors, Competitors, Customers. The allegation of wrongful act includes the following:
- Employment practices violations including allegations of discrimination, sexual harassment
- Exposures with reference to mergers and acquisitions
- Breach of statutory provisions and market misconduct resulting in inquiry and further actions
- Decline in the performance of the company
- Misrepresentation to creditors
- Defamation of competitors
- Deceptive trade practices
Some of the major extensions to the cover are listed below:
- Inquiry representation costs
- Crisis management expenses
- Lifetime Coverage for Retired directors
- Fines, penalties, punitive and exemplary damages where insurable by law
- Entity Securities claims (for listed companies)
- Entity employment practices claims
- Additional limit for non-executive directors
- Assets and Liberty Costs including prosecution, bail bond expenses
- Kidnap response costs cover
- Self-reporting expenses
- Definition of Insured to include members of sexual harassment committee
- Psychological support expenses
D&O policy does not cover all exposures. Some of the major exclusions are listed below.
- Prior and Pending actions/ claims
- Deliberate, Intentional and dishonest acts
- Bodily injury and property damage claims
- Contractual Liability
- Public Offering of securities
Directors need to ring fence their liabilities with an appropriate D&O policy. D&O liability insurance plays an important role for protection of directors. A good Directors and Officers liability insurance cover aims to provide relief to directors and officers, who may, notwithstanding all their best intentions and sound business practices, end up in some negligent acts – actual or alleged.
Since the policy wordings vary from insurer to insurer, it is necessary to understand clearly the coverage and exclusions offered in the context of business operations of a company.
(The details furnished above are only a summary of the policy features and do not describe all the terms, conditions and exclusions in the policy. Policy finally issued upon binding the cover represents the legal contract between the insured and insurer. If you are interested to know more, please get in touch with our representative)