Insurance of any kind is always meant to protect against losses during events of the future. In the case of D&O (Directors and Officers) Policy, company Directors and senior officers in a business are protected from personal losses. Since the business climate and the current pandemic have already shown how vulnerable lives really are, it makes perfect sense to get the D&O policy. Among general insurance policies, life, health, and motor are most common in India.
What Do the Directors and Officers Liability Insurance Cost Cover?
- D&O liability provides insurance cover to senior officers and Directors of companies, as mentioned earlier
- Fraud and criminal offenses are not part of this policy coverage
- The policy provides protection even if the company refuses or it doesn’t have the money to pay for indemnification
- Losses incurred during the lawsuit, including legal defence fees, are also covered here
- Coverage for the corporate entity is available in the form of “entity coverage”
- There is yet another form of coverage where the losses of directors and officers are covered when the company provides indemnification
- If everything is equal, businesses with a strong financial position and long operating history will pay less for D&O as compared to debt-laden younger businesses
Therefore, it has been clearly established above that D&O liability policy covers defence costs, legal representation costs, and court awards.
Companies are always involved in conducting business, as a result of which they can be subjected to various kinds of litigation risks. It is just not fair for the Director’s assets to be on hold for a decision that was taken with the company in mind.
Areas of Coverage for D&O liability insurance
D&O liability insurance would be most helpful in the case of the entities mentioned below:
- Customers– Marketing promotions know no bounds these days, and there’s every chance of stooping to a new low while promoting a product. Now if other agencies such as NGO’s or even customers accuse companies, there are chances of problems for the Director. Therefore, protection against wrongful trade practices and misleading ads is greatly sought after.
- Regulatory Authorities– In case companies cannot pay their taxes, there is every chance of a regulator authority to make Directors accountable for the same. As long as no unlawful actions have taken place or information hasn’t been hidden, the Director will be safe.
- Employees– D&O is also suitable when employees incorrectly sue Directors against termination, discrimination, or sexual harassment
- Shareholders– If the actions of one or many members of the Company Board’s lead to a decline in share prices and cause huge shareholder losses, this policy will prevent a lawsuit from being filed against Directors and the Company.
As mentioned above, only Directors and senior officers get protection against various aspects of company investigations under the D&O liability policy. In case companies want, they can opt for the following extensions that act as add-on covers for the policy:
- Tax Liability Extension– It gives tax liability coverage to individual Directors and officers but not to the company. In other words, dues unpaid by the companies due to financial constraints will not be covered here.
- Entity EPLI Cover-This is meant only for company protection against legal action, which makes it different form the Tax Liability Extension
Process of Obtaining D&O Liability Insurance
D&O insurance is obtained through a very simple process in real life. It commences once managers fail in their respective roles. Inaccurate disclosures, reporting errors, regulation violations, and insolvencies are some of the most common risk scenarios. After the concerned managers and the legal/risk management departments get to know about the claim, a description is handed over to the broker/insurer.
If the insurer loses the case against the scenario, payment is made for the defence cost and the financial losses. However, the ultimate claim is determined in accordance with the terms and conditions of the particular policy.
What if This Policy is not Taken?
Various problems concerning hiring new employees, making new investments, and starting new branches are handled under the D&O liability insurance policy. Companies as well as Directors and officers will be under the scanner for decisions that are not of personal nature. There is never a wrong or right in such a decision. It is that form of indemnity that allows a company to make decisions freely.
Companies with D&O coverage must not completely bank on the policy to rescue them; homework must be done in advance. This will prevent claims from being rejected unnecessarily, with deliberate misconduct and giving false information being two major reasons for the same. The top management must understand that insurance company agents understand their jobs well and will not be able to see through the façade. Companies must know what information to reveal and what to withhold.