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Directors and Officers Liability Insurance

A must have for your organisation

Are you a director of a company? If so, a Directors and Officers Liability Insurance Policy is a must for your organization. Let us tell you why.

In today's times, a Company Director is exposed to various litigation risks. The Director's personal assets are at risk due to wrong business decisions.

Consider the famous case of Satyam where even the innocent directors were sued for a huge sum and the D&O Insurance Policy had paid for their Defence Costs.

A Director's and Officer's Insurance Policy (commonly known as D&O Insurance Policy) would be immensely useful in such cases. A Directors and Officers Liability Insurance Policy provides cover for the liability of Directors on account of the wrongful or negligent acts committed by them in their managerial capacity.

Directors and Officers Liability Insurance

What is a Directors and Officers Liability Insurance Policy?

A Directors and Officers Liability Insurance Policy provides cover for Defence Costs and Damages that the Directors and Officers of a Company become legally liable to pay to the third parties on account of the financial and loss suffered by the third parties due to any wrongful act committed by the Directors or Officers in their Managerial Capacity. A Wrongful Act may be defined as Breach of Duty, Breach of Trust, Error, Omisssion, Negligence, Misstatement or Misleading Statement.

So, if a Director or Officer takes a decision on behalf of the Company which goes wrong, a Directors and Officers Insurance Policy will insure the Directors and Officers for the Defence Costs and Damages that they become legally liable to pay. The D&O Insurance Policy Coverage includes payment for Court Awards, Defence Costs or Legal Representation Costs incurred by the insured.

A Directors and Officers Insurance Policy is also known as a D&O Liability Insurance Policy or a Management Liability Policy.

What is the need for a Directors and Officers Liability Insurance Policy?

When Directors and Officers of a Company are making decisions, it could be decisions with respect to opening new branches or hiring new employees or decisions with respect to investments, these decisions are made on behalf of the Company. These decisions are not their personal decisions. These decisions benefit the employees, stakeholders and shareholders as well.

But if these decisions go wrong, the Directors and Officers are held liable for these decisions. An adverse judgement may also put the Director's personal assets at risk.

As a result, it is especially important for the Company to provide some form of Indemnity to the Directors and Officers of the Company so that they can take the decisions freely. A D&O Liability Insurance Policy provides protection to the Directors and Officers if any of the decisions taken by them goes wrong.

Who are the potential claimants under a Directors and Officers Liability Insurance Policy?

A Director or Officer is personally liable for his/her actions and failure to act in that capacity which puts the personal assets of Directors or Officers at risk. In today's times, the Directors and Officers of a Company are at risks of being sued through various avenues.

Some common cases where D&O insurance could be useful are as follows:

  • Employee Related Cases where an employee sues directors for wrongful termination, discrimination, sexual harassment etc
  • Customers can sue the Company in courts for misleading claims in advertisements and wrongful trade practices.
  • Directors of a company may be held accountable by the Regulatory Authorities if a Company does not pay its due taxes. The Directors could be levied punitive fines in such cases.
  • Shareholders may bring a lawsuit against the Company and its Directors, if any action of the Board results in a fall in share price leading to shareholder losses. Misrepresentation of facts and financial information in prospectus or leaking of confidential data could also result in lawsuits

A D&O Liability Insurance Policy insures the Directors and Officers of the Company from legal actions initiated against them by Employees, Customers, Shareholder etc.

What are the Key Features of a Directors and Officers Liability Insurance Policy?

The Key features of Directors and Officers Liability Insurance Policy are as follows:

  • Advancement of Defence Costs:
    All D&O Liability Insurance Policies offer Advancement of Defence Costs as a key feature. Advancement of Defence Costs means that the Insurance Company will not wait for the Final Judgment before starting to pay the Claims Expenses. The Insurance Company will start paying those Defence Costs as soon as the Insured starts incurring them.

  • Right to Defend Cover:
    Liability Policies are of 2 types: Duty to defend and Right to Defend.

    Right to Defend means that the Insured Party has the right to select its own lawyer with the consent of the Insurance Company and go ahead with the litigation. There is a reason why Financial Line Policies especially the D&O Policies, have a Right to Defend Form.

    Imagine if there is a claim on the CEO of a big company in India. The CEO would prefer a reputed lawyer to defend him rather than a lawyer selected from a Panel of Lawyers appointed by the Insurance Company under the Duty to Defend form of the Casualty Liability Insurance Policies. Right to Defend Form is one of the important features of the Directors and Officers Liability Insurance Policies.

  • Claims Made Principle:
    The Claims Made Principle says that the Claims should be made and reported to the Insurance Company during the Policy Period. Many times, the Insured does not inform the Insurance Company about a Claim Circumstance which might lead to the Claim getting rejected.

  • Coverage for Subsidiaries:
    D&O Liability Insurance Policies also provide Coverage for Subsidiaries. Also, if the Insured Party adds any new subsidiary during the Policy Period, for a certain threshold of something like 20% of the consolidated asset size of the Insured, the Subsidiary gets automatically added in the Policy without any requirement of approval from the Insurance Company.

  • Outside Directorship Cover
    Another important feature under the Directors and Officers Liability Insurance Policy is the Outside Directorship Cover.

    There are times when the Insured Company purchases a 5%-10% stake in another company and asks one of their directors to go and sit on the board of the Investee Company. The Director of the Insured Company who is sitting on the Board of the Investee Company is covered against any claim on the Directors and Officers of the Investee Company by the D&O Liability Insurance Policy of the Investor Company.

    For eg: Consider a company ABC Ltd. which has purchased that 15% stake in XYZ Ltd. ABC Ltd has nominated one of their directors to go and sit on the board of XYZ Ltd.

    Now, if there is a D&O Liability Claim on the Directors and Officers of XYZ Ltd and if that XYZ company does not have a D&O Policy, the Director of ABC Ltd who is sitting on the board of XYZ Ltd, will also get sued because the entire Board has got sued for that particular D&O Claim. In such a case, the DNO Liability Insurance Policy of the ABC Ltd will provide protection to that outside entity director. It will not provide protection to any other director, but only the outside director of ABC Ltd, who has been asked to go and sit on that board of XYZ company.

  • Cover for Retired Directors  Lifetime Cover:
    A Directors and Officers Liability Insurance Policy provides Lifetime Cover to the Retired or Resigned Directors along with the Current Directors as well. This is an important cover since Directors can also be sued after retiring for decisions they took while they were working.

  • Regulatory Crisis Response Cover:
    D&O Liability Insurance Policies are seeing a lot of Regulatory Claims where there are a lot of investigations against the Directors and Officers. When there is an investigation against the Director or Officer, they have to hire a lawyer to defend themselves, or probably a chartered accountant or auditor to present the case.

    In such circumstances, all those Professional Fees which are charged by these Professionals or Organisations are covered under the Regulatory Crisis Response Cover.

  • Emergency Costs
    Another important feature of a D&O Liability Insurance Policy is its provision for Emergency Costs. Any Liability Insurance Policy does not allow the Insured Party to accept any liability or to make any payments in any claim without the consent of the Insurance Company.

    But there are 2 policies: One is the Directors and Officers Liability Insurance Policy and another is the Cyber Insurance Policy, where there is a provision of Emergency Costs. Such a provision is included in the D&O Policy because there could be an emergency situation, wherein the Company or the Directors or Officers are not in a position to take the consent of the Insurance Company before going ahead with the litigation. Such Costs can be covered under the Emergency Costs section of the D&O Liability Insurance Policy.

  • Cover for Damage to Reputation:
    DNO Liability Policies also provide cover for Damage to Reputation. Sometimes, if there are false allegations against the Company and its Directors or Officers, these allegations may be published in the media which may result in an adverse impact on their reputation. The DNO Liability Insurance Policy provides a Cover for Damage to Reputation wherein the Insured Party can hire a PR Firm to refute the false allegations made against them.

What are the Add-On Covers available under a D&O Liability Insurance Policy?

All other sections of the D&O Liability Insurance Policy, whether it's investigation, whether it's Emergency Costs or any other Costs, the Policy covers only Directors and Officers. But there are 2 extensions, one is the Entity Security Extension, and the other one is the Entity EPLI Section. These 2 Add-On Covers are meant to cover the Company.

  • Entity EPLI Cover: Consider a situation where an employee of a Company, sues the HR director for discrimination and that he/she has not been given due promotion on time. This allegation will get covered over base policy because the allegation is against the Director.

    However, if the employee had sued the Company saying that there is a discrimination by the Company, the base D&O Policy would not have covered the claim since it is against the Company and not against the Directors or Officers. In such circumstances, the Company needs to opt for an Entity EPLI Extension so that the Policy will pay the claim on behalf of the Company also.

  • Entity Security-related Claim: Another Add-On Cover of the D&O Liability Insurance Policy, which covers the Company is the Security-related Claim. The Base D&O Liability Insurance Policy covers shareholders claims only against the Directors and Officers. However, in order to protect the Company in cases where the shareholder sues the Organisation, there is an Add-On Cover for Entity Security Claims which will provide cover for shareholder claims against the Company.
  • Tax Liability Extension: Another important Add-On Cover available under the D&O Liability Insurance Policy is the Tax Liability Extension. The Tax Liability Extension covers the individual Directors and Officers and not the Company for any tax liabilities which were due and supposed to be paid by the Company, but because of the financial constraints, the company was unable to pay those tax liabilities.

    These Tax Liabilities will get transferred on the Directors and Officers of the Company. In such situations, if the Company has taken a Tax Liability Extension under its Directors and Officers Liability Insurance Policy, the Policy will pay those taxes on behalf of Directors and Officers.

What are the Duties of Directors and Officers?

Directors and Officers of a company have 2 primary responsibilities to adhere to while executing their duties:

Duty of Care: Directors and Officers need to perform their duties in good faith and should exercise care that a reasonably prudent person in a similar situation and circumstances would exercise. They are also expected to exhibit professionalism and take decisions in the best interest of the company they work for

Duty of Loyalty: Directors and Officers of a Company should refrain from using their positions to further their own private interests or engage in activities that harm the interests of the company they work for.

Directors and Officers can get sued for Breach of these duties.

What are the coverages under a Directors and Officers Liability Insurance Policy?

A D&O Insurance Policy would cover the Legal Defence Costs and any liability or penalties arising out of wrongful or negligent act, Breach of Duty or Misstatement for the Directors and Officers of the Company covered under the Policy. The D&O Policy has provisions to cover Non-Executive Directors, Independent Directors and Retired Directors of the Company as well. The D&O Coverage includes payment for Damages awarded by the Court, Defence Costs or Legal Representation Costs incurred by the Insured.

A Directors and Officers Liability Insurance Policy provides cover under 3 Sections:

  • Side A Cover
  • Side B Cover
  • Side C Cover
What are the coverages under a Directors and Officers Liability Insurance Policy?

What is Side A Cover under a Directors and Officers Liability Insurance Policy?

Side A Cover of a Directors and Officers Liability Insurance Policy covers Non-Indemnifiable Claims. Non-Indemnifiable Claims means claims which are not payable by the Company. There could be certain situations where the companies are restricted by law and cannot provide Indemnification in certain types of allegations.

For Eg: If there are allegations of any type of fraudulent activity committed by the Director, the Company may not be allowed to indemnify such Directors or Officers. Another situation could be if the Company is facing a financial crunch. So, if the Company does not have money to back their Directors and Officers, in such circumstances, the Directors and Officers will have to pay the expenses from their own pocket, and subsequently the Directors and Officers Insurance Policy will provide reimbursement for Defence Costs and Damages directly to the Insured Directors and Officers. One advantage of Side A Cover is that it has Zero Deductible.

You can read our detailed blogpost on Side A Coverage in a D&O Insurance Policy.

What is Side A Cover under a Directors and Officers Liability Insurance Policy?

What is Side B Cover under a Directors and Officers Liability Insurance Policy?

Side B Cover under a Directors and Officers Liability Insurance Policy covers Indemnifiable Claims. Under Side B Cover, the claims are also against the Directors or Officers as under Side A Cover, but here the claims are indemnified by the Company. This means that the Company is paying expenses on behalf of the Directors and Officers and then subsequently asking for the reimbursement from the Insurance Company.

 

Side B Cover also has deductible unlike Side A Cover which has Zero Deductible.

What is Side B Cover under a Directors and Officers Liability Insurance Policy?

What is Side C Cover under a Directors and Officers Liability Insurance Policy?

Side A and Side B covers Directors and Officers of the Company whereas Side C Cover under a Directors and Officers Liability Insurance Policy deals with claims against the Company.

Claims against the Company under Side C Cover of a Directors and Officers Liability Insurance Policy deals with 2 situations: the Employment Practice Liability Insurance (EPLI) Section and the Shareholders Claims or the Security Claims Section.

What is Side C Cover under a Directors and Officers Liability Insurance Policy?

What are the exclusions under a Directors and Officers Liability Insurance Policy?

The major exclusions under a Directors and Officers Liability Insurance Policy are as follows:

Exclusions under a Directors and Officers Liability Insurance Policy

Any Claim due to Willful Misconduct of the Director and Officer is excluded

Any Claim due to an Act committed prior to start of the Policy is excluded

Criminal Fines and Penalties are excluded

Major Shareholder Exclusion: Claims brought by major shareholders (for eg: Shareholders with more than 15% stake) against the Directors and Officers are excluded

 

You can read our detailed blogpost on Exclusions under a Directors and Officers Liability Insurance Policy.

What is the average cost of a Directors and Officers Liability Insurance Policy?

The cost of a D&O Insurance Policy depends on the following factors

  1. Firm Turnover
  2. Coverages Required
  3. Prior Claims Experience
  4. Industry to which the firm belongs

The above list is not exhaustive and the Insurance Company at its discretion may ask for more documents as required.

What is the average cost of a Directors and Officers Liability Insurance Policy?
Worldwide Cover
Worldwide Cover
24/7 Claims Assistance
24/7 Claims Assistance
Emergency Cost Cover
Emergency Cost Cover
Cover for Retired Directors
Cover for Retired Directors
EPLI Cover
EPLI Cover
Entity Security Claims Cover
Entity Security Claims Cover

Get Best Quotes for Director and Officers Liability Insurance Policy

Purchasing a Directors & Officers Liability Insurance Policy requires technical understanding in terms of clauses coverages and limits.

Qian is an experienced Insurance Broker for Directors and Officers Liability Insurance Policy and the team at Qian can help you in tailoring the D&O Policy to the specific needs of the organisation in terms of the adequate D&O coverages and the limits.

You can rest assured of receiving best Directors and Officers Liability Insurance Policy Quotes with Qian.

If you wish to purchase a D&O Insurance Policy, feel free to reach out to us at support@qian.co.in or 022-22044989 or fill this Contact Form. We will get back to you within 24 hours, guaranteed.

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Yes, A D&O Liability Insurance Policy offers cover for Retired Directors.

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