Director’s And Officer’s Liability Insurance

The duties and liabilities of a Director/Officer are clearly stipulated in the Companies Act, . Directors/ Officers are now perceived as professional managers and professionals who should be accountable for their actions

The position of a Director/Officer is becoming far more onerous given the responsibilities and Duties entrusted upon them. The increase in litigation against directors reflects a change in the attitude of the general public towards greater management accountability vis-à-vis the latest Company Act and other Statutory Laws/Regulations.

Who Might Bring An Action?

The Director or Officer is open to actions from any of the following list of potential claimants .The list is not exhaustive

  • Shareholders – imprudent decisions on manging the finances, loans, investments etc.
  • Government/Regulatory Agencies – breach of legislation etc.
  • Business Partner – poor management of the company.
  • Competitor – Copyright and Patent infringement, deceptive trade practices etc.
  • Customer – Deceptive trade practice etc
  • Employee – Unfair dismissal, discrimination, sexual harassment etc

Wrongful Acts

The following is not an exhaustive list, but list provides typical examples of “Wrongful acts” which could be alleged against a Director or an Officer – 

  • Inaccurate statements of financial conditions.
  • Errors in annual accounts.
  • Misleading statements filed with Stock Exchange/ Regulatory Bodies.
  • Lack of judgment, diligence or good faith.
  • Mismanagement of funds.
  • Mis-statements in prospectuses.
  • Allotment of shares.
  • Unauthorized or imprudent loans or investments.
  • Failure to obtain competitive bids.
  • Imprudent expansion resulting in a loss.
  • Using inside information.
  • Unwarranted dividend payment, salaries or compensation.
  • Misrepresentation in acquisition agreement for the purchase of another Company.
  • Auditing & Accounting Practices.
  • Wrongful dismissal of an Employee, Sexual Harassment etc

All humans are prone to making mistakes. Directors and Officers are no exception to that. Directors and Officers of companies hold positions of trust. To protect the company and officers from the consequences of such wrongful acts, companies purchase a policy called “Director’s & Officer’s Liability Insurance”.

Director’s & Officer’s Liability Insurance (D&O) protects past, present, and future directors’, managers’, and officers’, of profit and non-profit organizations from claims or damages, resulting from the decisions and actions taken within the scope of their regular duties; or actual or alleged wrongful acts of error, misstatement, omission, misleading statement, or breach of duty, they may have committed during the course of their work tenure.

The cover is granted on a claims-made basis. Such claims include claims made while the policy is in effect or within a contractually agreed extended reporting period. 

What’s covered

The insurance policy covers:

The policy provides indemnity coverage for Legal and Defense costs, Damages and Expenses incurred, arising from claims made by own employees’, stakeholders’, customers’, competitors’, shareholders’, or members of the general public, due to wrongful decisions or acts committed during tenure as director /officer of the organization.

What’s not covered

The insurance policy does not cover:

  • Deliberate, dishonest and fraudulent acts.
  • Any known acts committed prior to inception.
  • Acts of war and nuclear risks.
  • Criminal acts.
  • Acts that come under excluded territories/jurisdiction.
  • Pending and prior litigation
  • Contractual obligation

In addition to the above, the policy also does not cover criminal, fraudulent, or intentional non-compliant acts or cases, where directors’ obtained illegal remuneration, or acted for personal profit.

Features of The Policy

  • Legal liability including costs to defend any civil action against the directors’ and/or officers.
  • Action can be brought against the Directors’ and/or Officers’ by own employees’, or shareholders’, or customers’, or competitors’, or members of the public, or regulatory authorities.
  • Defence of any claim can be taken over at the insurance company’s discretion, else the company must defend the case and claim the defence cost as reimbursement as per terms and conditions of the policy.
  • Jurisdiction of suits may be in India or anywhere in the world depending upon the business requirements of the customer and acceptance of the same by insurance company.

Why Buy The Policy?

It is important for organizations to buy the D & O policy as potential claims from employees, clients, and stakeholders, can be made against them, and/or against the directors, officers, and managers of the organization can badly impact their balance sheet.

At times, a single director or officer can be held responsible for wrongful decisions. Hence, it is important for Directors and Officers to be protected by way of an insurance policy rather than getting totally exposed at the risk of their personal assets.