January 6, 2022

Director's and Officer's Liability Insurance

Director's and Officer's Liability Insurance

Directors’ and Officers’ (D&O) Insurance is a liability insurance policy that seeks to extend financial protection to a business against any lawsuits arising out of its directors’ or officers’ misconduct / negligence. These individuals hold a lot of decision making power within the organization and their actions can impact the state of the company at large. As a result, claims of negligence or wrongdoing made against them could derail the business’s reputation and profitability. This risk becomes greater for startups and small businesses that are largely regarded as inseparable from their founders/ CEOs.

D&O Insurance is applicable for anyone who serves as a director, higher official, or a member of upper management of a for-profit or non-profit organization. It can also be taken by the committee members of a co-operative housing society. This insurance is payable to the company or to the directors and officers themselves as indemnification for third party claims towards negligence.

This policy covers the legal liability of the directors, officers, trustees, governors, company secretaries, or other persons employed in an executive capacity. It also covers legal costs incurred to defend any civil or criminal action taken against company executives.

These claims of misconduct made could be brought on by the business’s own employees, its competitors, or members of the public including customers, shareholders or regulatory authorities.

D&O Insurance will cover claims on any of the following grounds :

  • Regulatory investigations
  • Accounting irregularities
  • Allegations of sexual harassment, discrimination, wrongful termination or other employment practice violations
  • Shareholder/stakeholder claims
  • Misconduct relating to mergers and acquisitions
  • Failure to comply with corporate governance requirements or legal statutes

Some other covers offered by a D&O policy are :

  • Cover for retired directors
  • Cover for heirs, estates and legal representatives
  • Cover for damage to reputation
  • Cover for subsidiaries of the insured company
  • Outside directorship cover - this covers directors’ or officers’ liability in their capacity as a director, officer or trustee of any other organization (especially non profit organizations)
  • Public relations covers - this covers fees and cost of an outside public relations consultancy firm to minimize or prevent the risk of a claim

A Directors’ and Officers’ Liability Insurance policy excludes the following from its coverage :

  • Contractual liabilities such as compensation in case of breach of contract between the company and a client
  • Known liabilities that occurred before the commencement of this policy
  • Circumstances notified under a prior insurance policy
  • Pending or prior litigation, demands or judgements
  • Deliberately criminal or fraudulent act or omission or willful violation of statute or regulation
  • Damage of property or bodily injury
  • Illegal personal profits, remuneration or advantage through deliberate misuse of funds or other criminal activity
  • Fines and penalties
  • Pollution claims, war or radioactivity claims, workmen compensation, bankruptcy, theft of intellectual property, etc.

Directors’ and Officers’ Liability Insurance is mandatory for certain businesses in some countries. While it is not a legal requirement in India, it is highly advisable for businesses, irrespective of their size or growth, to purchase such a policy.

Learn more: Types of Business liability Insurance policies

Opinions, conclusions and statements of intent expressed in this article are that of the author and Verak does not accept liability for the views expressed unless confirmed by an authorized representative of the Company independently of this communication.