Directors & Officers Liability Insurance (D&O Liability Insurance)

Directors and officers liability insurance is a type of liability insurance catering to directors and officers of an organization, or to the organization(s) itself. It offers a reimbursement in case there are any losses or advancement of defense costs, if the insured faces any loss due to any legal action against alleged unethical or wrongful acts. The coverage includes defense costs resulting from any criminal and regulatory investigations as well as trials. Most of the criminal and civil actions are taken simultaneously against directors and officers. Although, intentional illegal activities, are not generally covered under directors & officers liability plans
It is associated with wider management liability insurance, as it provides coverage for the liabilities of the company or the personal liabilities of the directors and officers of the company.

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Importance of Directors and Officers Liability Insurance

D&O insurance safeguards past, present and future directors and officers of profit or non-profit organizations from any damage(s) arising from alleged/actual wrongful activities they may have been involved in. The plan offers security in case of any alleged or actual error, omission, misstatement, breach of duty, or misleading statement. There are some plans which extend the cover to employees as well.

When a Board of Directors is established, directors and officers liability insurance is useful. Generally, investors consider directors and officers liability insurance as a pre-requisite for providing funds to a company.

The scope of D&O liability insurance is mentioned below.

  • In case an organization incurs any losses due to erroneous actions or decisions taken by the directors and officers in fulfilling their duties according to the memorandum and articles of association.
  • In case of losses resulting from claims filed against them by any wrongful act in their capacity.
  • With the written consent of the insurance provider, any legal expenses resulting from the prosecution of any director or officer for any examination, inquiry, investigation, or proceedings by the concerned authority.
  • Any expenses incurred by the shareholder of a corporation for pursuing a claim accusing any director or officer, and organization is lawfully obliged to pay as per the ruling of a court.
  • It provides indemnity to the legal heirs/legal representatives of the director or officer in case the director or officer becomes insolvent.

The Features of Directors and Officers Liability Insurance

Directors and officers of corporations are answerable to their shareholders, employees and the general public of the organization. Any wrong decision can lead to a legal hassle. The consequences followed by such allegations can trigger a civil or criminal action against directors and officers. The directors and officers’ liability insurance plans offer cover against a wide array of civil and criminal actions that can be taken against directors and officers.

D&O Insurance Coverage

  • Right to defend coverage
  • Coverage for subsidiaries
  • Coverage for outside directorship
  • Coverage for retired directors
  • Employment practice liability cover
  • Cover for negligence/ failure to monitor any claims related to professional indemnity
  • Regulatory crisis response coverage
  • Coverage for assets and liberty costs such as bail bond, prosecution, civil bond expenses etc.
  • Damage to reputation cover
  • Coverage for heirs, legal and estates representatives
  • Bilateral discovery period cover
  • Emergency expenses coverage
  • Kidnap response coverage
  • Defense cost coverage
  • Advancement of defense expenses
  • Severability coverage
  • Special excess security for non-executive directors
  • Coverage for pollution associated claims for defense expenses and shareholder claims

Why is a Directors and Officers liability insurance plan required?

Here are a few reasons that make directors and officers insurance a necessity.

  • Vulnerability of stakeholder/ shareholder claims.
  • Discrimination, sexual harassment, allegations.
  • Accounting irregularities.
  • Regulatory investigations.
  • Mergers and acquisitions related exposures.
  • Requirements of corporate governance.
  • Compliance with several legal statutes.

The plan is formulated, especially, to safeguard the legal claims for wrongful acts such as errors, omissions, misstatements, breach of duty, negligence etc. of directors/officers while on duty. The plan caters to the directors, officers and the organization itself.

Key Benefits of Directors and Officers Liability Insurance Plan

Furthermore, the key benefits of directors and officers insurance plan will help you to understand its necessity.

  • Indian corporations must purchase D&O insurance plan in order to safeguard their directors and officers from various exposures resulting from the compliance with several statutes. Directors are more likely to uphold demanding legal obligations.
  • Independent as well as nominee directors are accountable to stakeholders.
  • When Indian companies foray into the international market in order to sell out their products or services, they need to buy Directors and officers insurance to safeguard their overseas exposures.

D & O Liability Insurance- FAQ's

  • Q: What is directors’ & officers’ insurance?

    Ans: As Directors or officers face a high-risk in their profession, it is important to be covered under an insurance cover. Directors’ & Officers Insurance protects the insured against defense costs arising from any criminal or regulatory investigations. However, intentional/deliberate illegal activities are not covered under this policy.
  • Q: What are the conditions/situations covered by directors and officers liability insurance policy?

    Ans: Some of the conditions that make this insurance plan a must-buy for the Directors and Officers are:

    1. Susceptibility to stakeholder claims

    2. Authoritarian investigations

    3. Irregularities related to accounts

    4. Sexual assault, employment violations or discrimination accusations

    5. Exposures associated with acquisitions and mergers

    6. Requirements related to Corporate Governance

    7. Compliance with a range of legal statutes

  • Q: Who can use this policy?

    Ans: This policy can be used by-

    1. Employees

    2. Suppliers

    3. Competitors

    4. Regulators

    5. Customers

    6. Shareholders

    7. Other stakeholders

  • Q: Who does the cover apply to?

    Ans: The cover is applicable to former, present and future members of the board of directors, top management or any employee performing a supervisory role.
  • Q: What are the exclusions of this plan?

    Ans:

    1. Illegal personal profits, payments or advantages

    2. Claims against bodily injury or property damage

    3. Violation of legislations regarding insider trading

    4. Penalties, fines or multiple damages

    5. Fraudulent act or omission or willful violation of official norms