Directors and Officers Insurance Policy (D&O Insurance)
This can be said if we keep in mind the announcements of some major organizations. If the year 2021 was the year of The Great Resignation, then the year 2022 was definitely the year of retrenchment. Given the changes in the economy, layoffs may be a harsh but appropriate measure for some companies. However, given the significant implications of such a move, the potential for associated risks, including legal action, cannot be ignored. Therefore, Directors & Officers Insurance Policy is becoming a necessity to protect the leadership of the company.
What is Directors and Officers Insurance Policy?
Directors and Officers Liability Insurance, also known as D&O Insurance, is basically a liability insurance policy. D&O insurance is payable to the directors and officers of a company, or to the organization(s) itself. The policy pays in the form of indemnification (reimbursement/compensation) against the losses or advancement of defence expenses in the event where an insured undergoes such a loss as a consequence of a legal action brought for alleged wrongful acts in their aptitude as directors and officers.
Directors and Officers Liability insurance is designed to provide monetary protection to the directors and officers of a company in such cases where a lawsuit is filed against them in juxtaposition with the performance of their duties as they relate to the company. This policy offers protection in the event when claims are filed against directors, officers and employees (of an organization) for alleged or actual breach of duty, neglect, errors or misstatements in their managerial capacity.
D&O insurance policy puts your organization in the safe zone against claims alleging financial loss arising out of misconduct of the company. The coverage under Directors and officers liability insurance typically extends to 3 areas:
- Coverage for individual directors and officers.
- Reimbursement coverage to the company for a contractual obligation to indemnify directors and officers that serves on the board.
- Protection for the company itself.
Why Get a Directors and Officers (D&O) Liability Insurance Policy?
Directors and officers liability insurance has its own significance since claims from employees, stockholders, and clients can be raised out of the blue against the company or its directors. Given that the directors and officers can be held liable for wrongful acts in the discharge of their accountabilities as directors and officers of the company, most of them will want to safeguard themselves to escape such scenarios and avoid putting personal assets at stake.
Salient Features and Benefits of Directors and Officers (D&O) Liability Insurance
Directors and officers (D&O) liability insurance protects the personal assets of corporate directors and officers in such circumstances where they are personally sued by competitors, investors, employees, customers, vendors or other parties, for actual or alleged wrongful or unlawful acts in managing a company. D&O insurance certainly has a plethora of priceless benefits on offer for the directors and officers of a company, organization or firm.
- Financial Backing
Directors and officers liability insurance which basically protects the company as well covers settlements, legal fees, and other costs. A financial backing is offered by the D&O policy for a standard indemnification provision, which puts officers and directors in a risk-free zone against losses because of their role in the company. This may be one of the reasons why many officers and directors would like to go for a company that provides both indemnification and D&O insurance policy.
- Legal Cost Reimbursement
When a claim is filed, D&O insurance policies can provide coverage for legal cost against a variety of claims. Directors and Officers Liability Insurance, in particular, can provide financial compensation to leaders of private companies following allegations of wrongful acts, negligence, errors in judgment and financial management. Provided that D&O lawsuits can occur from anywhere without an advanced notice, it’s very important for private company leaders to arm themselves with the right D&O policy.
- Protection against Tax Liability, Civil Fines and Penalties
In case of the firm’s bankruptcy, if the Director is held personally legally responsible for unpaid corporate taxes, it can be covered under D&O liability insurance policy. Directors and Officers Liability Insurance can also cover the penalties and civil fines levied by a court of law of any appellate or statutory authority. These covers are available for purchase as customized add-ons with D&O policy.
- Covers Directors Personal Liability
Directors & Chief Officers of a company can be held personally accountable for acts where they breach their authority as per the Companies Act 2013. In case of such scenario, the assets of the directors and officers can be impounded, or, on a higher note, they can even get arrested. Directors and Officers Liability Insurance helps protect against such claims including paying for the costs to free-up the burdens on Director’s personal assets and liberty through Bail bond expenses.
- Worldwide Coverage
If the company operates in abroad locations, D&O insurance policies can provide worldwide coverage for both jurisdiction and territory. Directors and Officers Liability Insurance, therefore, could offer protection against the claims arising out of shareholders, suppliers and clients based in abroad locations.
- Comprehensive Cover
Directors and officers liability insurance covers an extensive area of litigation that could arise from shareholders, customers, employees, vendors and the general public. The D&O insurance also covers lawsuit arising out of the acts of another company, where the insured is serving as a nominee director.
- Availability of Side A Cover
D&O insurance policy provides Side A and Side B Cover. Side A cover is specifically designed to cover Directors and Officers when the company is unable to compensate them directly. The company may not be capable of compensating its Directors when it either goes bankrupt or prohibited by law to do so. Directors and Officers, under Side A cover, can directly seek out for indemnification from the insurer without referring to the company. Side A cover, in general, has Nil Excess.
- Employee Related Claims
Employees could sue a company for such acts like biased termination, sexual harassment etc. An extension named Employment Practices Liability Insurance (EPLI) and Entity EPLI is carried by the directors and officers insurance. The Entity EPLI extension widens this coverage to the company as well.
- Full Defence Cost
The Director Liability Insurance policy can take care of the lawyers’ fees in order to defend a case in court. Additionally, by add-on covers it can reimburse the expenses to act in response to an investigation by authorities, regulatory notice, and cost of hiring a PR consultant to reduce losses.
- Peace of Mind
Without any prior notice, D&O claims can arise out of a variety of sources, including clients, employees, contractors and government bodies. For private companies, claims from competitors and creditors are very common in general. By providing timely and effective coverage, D&O insurance policy makes sure that private company leaders are protected regardless of where claims originate.
Who Are Covered under Directors and Officers (D&O) Liability Insurance Policy?
Directors and Officers (D&O) liability insurance provide protection for personal liability of directors and officers arising from any unlawful or wrongful act done by them in their administrative capacity. D&O insurance covers the following under the policy:
- Directors and Officers employed by the organization.
- Directors and Officers of subsidiary companies.
- Non-executive or independent directors.
- Employee of the company who is acting in a managerial or supervisory capacity for the company.
- Employee of the company who is the risk manager.
- Company Secretaries.
- Employee of the company other than a director or officer, acting as a lawyer on behalf of the company.
- Any employment or security claim.
- All other claims only if such claim is continuously made against a director.
What Are Typically Excluded under a D&O Policy?
Just like any other insurance policies, directors and officers liability insurance certainly has some exclusions. That means, the D&O insurance policy will not offer any coverage under certain circumstances. The general exclusions under Directors and Officers Liability Insurance policy follow:
- Personal profiting
- Accounting of profits
- Property damage
- Bodily injury
- Pending and prior litigation
- And any other illegal compensation exclusions.
However, it is to be noted that many of the areas mentioned in the exclusion are covered under a different type of insurance, like a Fiduciary or General Liability policy.
Still many private organizations and companies overlook the importance of having directors and officers’ liability insurance, they don’t believe they need D&O insurance. This can be dangerous thinking, because just one D&O claim can consume the personal assets of a company in just one shot.
Directors & Officers Liability Policy (D&O Insurance) for Listed Companies
Listed Companies are the Companies whose securities are listed with the Stock Exchange viz-a-viz, National Stock Exchange of India or Bombay Stock of India.
Such Companies are required to comply with the Act, Rules and Regulations of SEBI in addition to the Companies Act. An express requirement triggers the buying of D&O Insurance by Listed Companies.
As per the SEBI (Listing Obligations and Disclosure Requirements) Regulations or SEBI (LODR) Regulations for the sake of brevity, it is mandatory for the Listed Companies to undertake Directors and Officers Insurance for its Independent Directors.
As per Regulation 25(10), the top 500 Listed entities in terms of Market Capitalization shall undertake D&O Insurance for all its Independent Directors, the quantum and the risks of which shall be decided by the Board of Directors.
Also, as per Regulation 25(12); inserted SEBI (LODR) (Fifth Amendment) Regulations, 2021, a ‘high value debt listed entity’ shall also undertake D&O Insurance for its Independent Directors for such sum assured and risks as may be decided by the Board.
High Value Debt Listed Entity are those entities which has listed its Non-Convertible Debt Securities and has an outstanding value of listed non-convertible debt securities of Rupees Five Hundred Crores and above. (Regulation 15(1A) of SEBI LODR).
Directors & Officers Liability Policy (D&O Insurance) for Non-Profit Organizations
People tend to be misguided about the D&O Insurance and believes that it is required and necessary only for the big organization working globally and who are engaged in high-risk industry. However, this is only a misconception.
Directors and Officers of even a midsized organization are equally exposed to personal liability due to their position.
Non-Profit Organizations are most exposed to such litigations due to their position and impact in the society. One wrong move by them, even if unintentional can entangle them in a legal battle that can prove to be not just harmful but also financially draining. It is extremely important for the Board of a Non-Profit Organization to protect the organization as well as the Directors and Officers with a D&O Insurance. Be mindful of the fact that taking up an insurance does not prevent the happening of the event but it do help in mitigation of the risks and losses that may arise of because of happening of that event.
Therefore for all Non Profit Organizations, big or small, a D&O Insurance is a must.
Information Sourced from: GIBL.IN & Taxguru.in
In the present corporate scenario, it is not difficult to understand the importance and necessity of safeguarding oneself with the Insurance of a kind as discussed above. If we as an individual are not casual about our life Insurances then why treat a D&O differently even though it’s equally essential.