D&O liability insurance policy

A Company does not make decisions. It appoints a board of directors, officers and managers to make decisions on its behalf. In making these decisions the directors and officers not only place the company at risk from actions by an aggrieved party, they also place themselves personally at risk. A director’s personal liability is unlimited. All his personal assets are at risk. Unlike the Company, he cannot take shelter under limited liability. Directors are jointly and severally liable. It is the directors who manage the assets and control the company’s day to day affairs. Directors are liable personally to pay losses suffered by the Company following an act which is wrong, negligent, outside the Company’s authority, beyond their power, or which evidences insufficient skill and care in managing the Company’s affairs.

Directors and officers are bound by duty towards various stake holders — shareholders, employees, creditors, customers, competitors, members of the public, government and other regulatory bodies. Any breach or non-performance in the duties can result in claims against the companies and/or its directors of the company by reason of any wrongful act in their respective capacity.

D&O insurance affords protection to directors and officers from liability arising from actions connected to their corporate responsibilities. The policy provides indemnity to the directors and officers in respect of:

At its most basic and in vanilla version, D&O insurance affords protection to directors and officers from liability arising from actions connected to their corporate responsibilities. Due to general expansion in the industry, changing legal and economic landscape, market pressures and the industry’s responses to the development of case law, D&O insurance has grown beyond its original and basic coverage. Thus it is possible to build in various coverages in a single policy now. Some of them are discussed below.

Although each policy uses its own language “Side A Coverage,” typically provides coverage directly to the directors and officers for loss – including defence costs – resulting from claims made against them for their wrongful acts. Side A Coverage applies where the company does not indemnify its directors and officers. A company may not indemnify its directors or officers because it is prohibited by law from doing so or is financially incapable of doing so, due to bankruptcy, liquidation, or lack of funds. The laws regarding indemnification differ from jurisdiction to jurisdiction. Generally, the deductible is NIL for Side A.

A typical Insuring Agreement B, or Side B coverage reimburses a company for its loss where the company indemnifies its directors and officers for claims against them. Generally, Side B coverage is subject to deductible.

This is also referred to as Side C Coverage. Here coverage is built in for the entity also along with the insured director or officer in respect of some exposures as given below.

Entity Securities Coverage: Indemnity is provided to the company against securities claims. This coverage becomes relevant when the entity gets listed and definitely when the listing is in litigious environments like USA and Canada.

Entity EPL (Employment Practices Liability) Coverage also has also gained popularity with the marked increase in the number of claims resulting from wrongful acts – actual or alleged, in employment practices – often by endorsement to the D&O policy or as a stand-alone policy issued to the company. This coverage typically protects directors, officers, employees and/or the company against employment-related claims brought by employees and, in certain circumstances, specified third-parties.

Companies have to weigh the pros and cons when they are building in the entity coverage as a part of the D&O liability insurance, as it has the potential to dilute the regular limits for the directors and officers.

The D&O policy is not a panacea. It is certainly not the first line of defence. It is not a replacement for sound management & corporate governance. But, a good policy helps in as much as it reduces the apprehensions and addresses the concerns of the Directors& Officers so that they can concentrate on their work to take the company on growth path – Quarter to Quarter to the satisfaction of all stake holders and society. 

As in the case of other insurance policies, this D&O policy also has extensions and exclusions which need to be clearly understood before the commencement of cover so as to avoid contract unpredictability.

(The information contained and ideas expressed herein represent only a general overview of subject covered. It is not intended to be taken as advice regarding any individual situation and should not be relied upon as such. Insurance buyers should consult their insurance and legal advisers regarding specific coverage and/or legal issues)