DIRECTORS AND OFFICERS LIABILITY INSURANCE

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.

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.

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.

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.

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.

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.