How Beneficial is a Directors and Officers Liability Insurance Policy?
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Modified 20 February 2019
From time to time we come across news headlines covering lawsuits filed against the officers and directors of big corporate houses. For the directors and officers of a big firm, it is almost inevitable to avoid the legal problems and thus, protection from a legal trial becomes necessary for such people and this is where the role of Directors and officer’s liability insurance comes into play. It includes policies that cover legal costs and payouts in case of any legal liabilities.
Directors and officer’s liability insurance is an insurance that covers the directors and officers of a company against any claims made while they are serving as the members of the company. It basically covers the claims arising due to poor financial decisions or wrongful practices of the directors of the organization.
General Cases where D&O Insurance is Useful
Directors and officer’s liability insurance proves to be useful under the following circumstances. Have a look:
- Failure to Comply with Workforce Laws: It includes wrongful termination of an employee without any legal or justified reason. The reason for wrongful termination can be both personal or discriminatory for example termination of an employee on the religious grounds.
- Breach of Fiduciary Duties: When a company issued by its creditors who are in need of some capital and the company fails to provide it, leaving the organization with outstanding payments.
- Intellectual Property Theft: When one of the former employee or directors of the company is found to be in possession of intellectual property of the company such as licenses to access proprietary assets of the company. He/she can be sued by the current directors of the company and the cost of the legal procedures would be handled by the Directors and officer’s liability insurance.
- Misinterpretation: Misinterpretation can occur in multiple ways and most common being when the directors and officers of the company overestimate the capabilities of their production line. For example, a company undergoes a contract with a potential customer for a large order, but when the production starts it is found that the order is too large to be completed before the customers’ given deadline. It will eventually lead to a situation where the customer will sue the Board of Directors of the company.
- Directors versus Director Action: Such a situation arises when one of the directors of the company deliberately tries to manipulate the net worth of the company for personal gains.
- Other Reasons
- Corrupt usage or misuse of funds of a company
- Misuse of company’s assets
- The absence of corporate governance
Why Directors and Officer’s Liability Insurance is Important and who is it for?
All the directors and officers of any organization have public exposure and they are vulnerability to risks regarding their practices and working approach is high. Such risks can sometimes lead to financial and legal liabilities. Directors and officer’s liability insurance takes care of all the cost involved in these processes.
It is a popular myth that Directors and officer’s liability insurance is meant for public domain companies but findings of some recent surveys revealed something otherwise that all public, private and non-profit organizations face legal issues concerning their serving Directors and Officers and thus, it is not necessarily true that D&O liability insurance is only meant for public domain companies only.
Types of Insurance and Coverages
The coverage provided by a Directors and officer’s liability insurance is broadly described below. Coverage is provided to the directors and officers and under certain circumstances employees too -
- Settlement cost, defense cost and the judgment cost in situations like bankruptcy are declared by the company.
- Payment on behalf of the insured that includes the directors, officers and sometimes employees too, if they are indemnified by the company.
- Loss faced by the insured for a legal claim and found to be legally liable for committing a wrongful act or practicing wrongful market strategies.
- The payment covered also includes the defense cost.
As we mentioned in the first line of this article that lawsuits against organizations are not rare these days around the world. Due to this reason Directors and officer’s liability insurance has is crucial for every company having a board committee or an advisory committee contradicting the famous myth that this particular insurance is only meant for the companies that are in public domain.
Even simple math reveals that a company can save a large amount if it is insured under D&O liability insurance because even small claims in case of a lawsuit are larger than usual premiums paid for one such insurance. We hope that you got some useful information out of this discussion because throughout this article, we tried to cover each and every detail about the Directors and officer’s liability insurance and we hope that you also shared the similar opinion.
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