Directors & Officers (D&O) Liability insurance protects the people who serve as directors or officers of a company from personal losses if the organization’s employees sue them, vendors, customers, or other parties.
D&O insurance can cover defense costs, settlements, and other costs associated with wrongful acts, allegations, and lawsuits. In addition, directors’ & Officers’ insurance is essential to a corporate risk management strategy and can help your Company attract and retain qualified executives and board members.
Typical claims under Directors and Officers Liability Insurance arise from shareholders, customers, regulators, and competitors (for anti-trust or unfair trade practice allegations). Directors’ and Officers’ Liability Insurance cover should be extended to directors or officers previously employed by the Company. The fact that a director is dead may provide a good reason not to be sued, but legal action can be taken against the executors and beneficiaries of his estate.
Directors and Officers Insurance is often confused with Errors & Omissions Liability. However, the two are not synonymous; Errors & Omissions is concerned with performance failures and negligence concerning your products and services, not the performance and duties of management.
Generally, it is a good idea to carry both Directors and Officers Liability Insurance and Errors and Omissions Liability Insurance. Directors and Officers Liability insurance is called D&O in the insurance industry.
Scope of Cover Under a Directors and Officers Liability Insurance
- Coverage against any loss that the organization may incur on account of mistaken actions taken as Directors & Officers in pursuance of their duties under Memorandum and Articles of Association.
- Coverage against loss arising from claims made against them because of any wrongful Act in their official capacity.
- Legal costs & expenses incurred with the insurers’ written consent arising out of prosecution (criminal or otherwise) of any director/officer and attendance at any investigation, examination, inquiry, or other proceedings by the authority empowered to do so.
- Expenses incurred by any shareholder of the Company in pursuance of a claim against any Director / Officer, which the Company is legally obliged to pay, under the order of a Court.
- Provide indemnity to the estate of legal heirs or legal representatives of the Director/officer if the Director/officer is getting insolvent.
Who can bring an action against Directors and Officers?
- Employees
- Suppliers
- Competitors
- Regulators
- Customers
- Shareholders
- Other stakeholders
What is excluded in a D&O Liability Insurance Policy?
- Liability for criminal wrongs.
- Fines and penalties for civil wrongs.
- Prior or pending litigation.
- Suits arising from the person who is a major shareholder.
- Bodily injury/ property damage · Infringement of intellectual property rights.
Premium Charged under a D&O Liability Insurance
Premium chargeable depends on the
- Limits of indemnity,
- Industry of the proposer,
- The capital structure of the Company, Source of Shareholder funds – Foreign v/s Domestic exposure, Debt structure,
- Credit rating of the Company to honor future financial commitments, etc.
Bottomline: D&O Liability Insurance Safeguards a Company
The right policy will provide coverage regardless of who is suing the directors and officers. It’s important to remember that company leadership can be sued by many different parties, not just investors but also customers, vendors, and even employees.
A D&O policy Covers directors and officers when the Company refuses or cannot provide indemnification. This is most commonly seen in cases of bankruptcy. It will cover companies that decide to indemnify their directors and officers. The D&O policy, in this case, will reimburse the Company for defense and other related costs. It also covers the Company itself. If the Company is being sued for financial mismanagement, the D&O policy will provide coverage.
The coverage that a company buys will vary and depend on each Company’s individual business characteristics and needs.
