What is Directors and Officers (D&O) Liability Insurance?

In order to protect an organization and its decision-makers from the risk of getting sued or being held legally responsible for any sort of malpractice, negligence or injury, there is a type of insurance commonly known as Liability Insurance.

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Liability Insurance India offers many policies that cover the legal payouts and the legal costs for which the insured would be responsible if cases filed against him/her found to be legally liable. There are many types of liability insurance and one of them is Directors and Officers Liability (D&O) Insurance which has been discussed here.

All you need to know about D&O Insurance

In case any managerial decision has adverse consequences relating to the financial problems, then D&O Liability Insurance comes in handy. In other words, this insurance is all about safeguarding the previous, present and preceding directors and officers from any sort of damage arising from wrongful activities, which they might be involved in. The Directors and Officers  Insurance is very useful whenever there is an establishment of a new Board of Directors. The officers are not liable for the losses that are incurred by the company during their service.

Why do you need Directors and Officers Liability Insurance?

There are several reasons that spell out the need for and importance of D&O Insurance. Below, we have enumerated some of these reasons:

  • It complies with several other legal necessities.
  • In the event of fraud.
  • It is an important step toward good corporate governance.
  • In case of accounting irregularities.
  • It is needed when cases of sexual harassment are filed against a director.
  • In case of any failure to comply with the laws of the management committee.
  • To regulating investigations
  • For exposures related to mergers and acquisitions.
  • If there is any misuse of the organization’s funds.
  • In case there is a breach of responsibility on behalf of the trustee that leads to bankruptcy or financial loss.
  • If the assets of the company are misused.

Who are the Persons Covered under this D&O Insurance?

The following persons are covered under D&O insurance:

  • The directors and officers of the organization.
  • The independent or non-executive directors.
  • The employee who is appointed as the risk manager of the company.
  • The employee of the company who is presently acting in the supervisory or managerial capacity of the company.
  • The secretaries of the company.
  • Any other claims if made continuously against a Director.

Who are Officers and Directors?

The persons holding the following positions can be termed as the Directors and Officers of a particular organization:

  • A person who has been listed as a Director in the public prospectus issued by the Company.
  • The employee of the company, who had in the past been or in the present is, a member of the corporate general counsel of the policyholder.
  • A person who, in the past has been or in the present is, a shadow director or de facto director of the company.
  • Any person, who has been in the past, or in the present is or will be in the future director, supervisory board member, management committee member, officer, management board member or governor of the company who has been duly elected by law.

To put it simply, it can be said that the Director and Officers Liability Insurance is applicable to any person who holds a managerial or supervisory position of a company. The concerned person can be an employee, a member from the Board of Directors, or part of the organization’s management. The persons who can accuse officers and directors are generally the employees, customers, shareholders, competitors, suppliers, regulators and other stakeholders. Also, the monetary limit up to which cover is provided is specified in the policy when it is purchased.

Features of Directors and Officers Liability Insurance

Most of the D&O Liability Insurance share the following features, although some might vary from one insurance company to other:

  • It protects the company or organization from any sort of legal liabilities that might arise if a director or officer mismanages any responsibility leading to a significant loss for the company.
  • In this regard, it should be mentioned that this type of insurance policies excludes damage of property and bodily injury, discrimination and dishonesty by the insured, defamation of character, and violation of the laws as laid down by the Liability Insurance India.
  • The claims of liability can only be covered if they are made within the time frame of the policy. There is a stipulated period for each policy, which can be extended up to 72 months.
  • Usually, these do not contain any explicit duty to defend the persons who have been insured.
  • Any sort of property damage is also not included in the insurance policy.

Benefits of D&O Insurance

The benefits of having insurance are manifold. You will be able to enjoy many advantages, some of which have been listed below:

  • If an organization faces losses due to an erroneous decision or action taken by the supervisory board and/or the directors and officers, as per the articles and memorandum of the association.
  • With the help of this insurance plan, indemnity can be provided to the legal heir or legal representatives of the officer or director, in case he is rendered insolvent and bankrupt.
  • All the legal expenses that will result from the prosecution of the director and officer will be carried out with the written consent of the insurance provider.
  • Fair resolutions to the claims are provided by the insurance which implies that there is a chance of getting full coverage in certain cases.
  • Defense expenses are also included in the policies and this cover does not diminish the overall limit of the liability as specified in the policy.
  • All the insured persons under this policy are eligible for cover against cases of sexual harassment, wrongful termination, discriminatory acts and other acts that might incur loss to the organization.
  • Besides protecting the officers and directors, it provides a cover for the company itself.
  • You shall be able to cover a wide variety of claims by investing a relatively low amount of money.

Besides these, there are many other benefits which help each and every organization to insure itself along with its movers and shakers, regardless of the size of the organisation.

Importance of Directors and Officers Liability Insurance

By analyzing all the above mentioned details about the Directors and Officers Liability Insurance, it is evident that this is indispensable for a business. There shall be instances where investors might litigate officials of the company, which can be a very difficult situation to handle. It’s possible that the business can incur significant financial losses. This liability insurance will help you face all such eventualities. So stay insured and let your business scale the heights of success.

Written By: PolicyBazaar - Updated: 29 July 2021