Directors and Officers (D&O) Liability Insurance?
Every now and then we come across news headlines covering lawsuits filed against the directors and officers of large organizations. Out of all the technicalities covered in the news what really interests us is the claim amount that is paid by the company because money always bling in our eyes and then, many of us also think about how the companies pay for these large amounts, who is managing all these lawsuits or doesn’t it affect the financial status of the company. Well for the last question, it does affect the financial status of the company but not to the extent that you may assume and for the claim amount, there is a liability insurance available in the market. We are talking about the Directors and officer’s liability insurance. In this article, we are going to discuss everything about D&O liability insurance starting from the basics and moving on to the coverages provided under this liability insurance and which individuals are covered under this policy.so without any further ado, let us get started.
What is Directors and officer’s liability insurance?
For the directors and officers of a firm, it becomes kind of difficult to avoid the legal problems and thus, protection from a legal trial becomes necessary for these people and this is where a Directors and officer’s liability insurance steps into the play. It includes policies that cover legal costs and payouts in case the insured person is legally liable.
Definition: Directors and officer’s liability insurance is an insurance that insures the directors and officers of a company for the claims made against them while they are the serving members of the company. In general sense, this insurance basically covers the claims that arises as the effect of poor financial decisions or wrongful practices of the directors of the organization.
It might not be a surprise that if some of the readers are not getting the real sense of what actually is Directors and officer’s liability insurance and for them, we would suggest that you should hold your doubts until the next section and after reading that you will definitely have a better idea of what D&O liability insurance actually is.
General cases where D&O insurance is useful
To get a better understanding of the where does a Directors and officer’s liability insurance proves to be useful, below, we have put together some of the general cases that can occur in any of the organization. Have a look:
- Failure to comply with workforce laws
Common example of this particular type include wrongful termination of an employee without any legal or justified reason from the authorities followed by Suing of directors by these employees only. The reason for wrongful termination can be both personal or discriminatory for eg. An employee was terminated for belonging to religious minority and then he sued the directors of the organization for these practices.
- Breach of Fiduciary Duties
When a company is sued by its creditors who are in need of some capital and the company fails to provide it by evaluating and securing the sale of company’s assets before time which leaves the organization with outstanding payments.
- Intellectual Property theft
When one of the former employee or director of the company is found to be in possession of intellectual property of the company like licenses to access proprietary assets of the company. Now, he can be sued by the current directors of the company and legal procedures and its costs would be handled by the Directors and officer’s liability insurance.
Misinterpretation can occur in multiple ways and most common being when the directors and officers of the company overestimate the capabilities of their production line. For example, a company undergoes a contract with a potential customer for a large order, but when the production starts it is found that the order is too large to be completed before the customers’ given deadline which happened because the owners of the company overestimated their production capabilities which eventually lead to the situation where the customer sued the Board of Directors of the company.
- Directors versus Director Action
This case arises when one of the director of the company deliberately tries to manipulate the net worth of the company for personal gains.
- Other Reasons
- corrupt usage or misuse of funds of company
- Misuse of company’s assets
- Absence of corporate governance
Why Directors and officer’s liability insurance is Important and Who is it for?
All the directors and officers of any organization have public exposure and thus, various risks regarding their practices and working approach arises too. Now, these risks can sometimes put individual directors in a situation where they may have to suffer a financial loss against lawsuits filed against them. The loss amount would include the legal cost and the amount to be paid to the other party if found legally liable. Now, if this loss amount is paid the company itself, then the financial status of the company might be affected adversely and the further operations of the company may be affected too. Therefore, to avoid having to pay the claim amount to the other party, these companies purchase the Directors and officer’s liability insurance which on behalf of the company takes care for all the cost involved in these processes.
It is a popular myth that Directors and officer’s liability insurance is meant for public domain companies but findings of some recent surveys revealed something otherwise that all public, private and non-profit organizations face legal issues concerning their serving Directors and Officers and thus, it is not necessarily true that D&O liability insurance is only meant for public domain companies only.
Types of Insurance and Coverages
Since, Directors and officer’s liability insurance is a types of liability insurance therefore it can be purchased as a bundle including other forms of liability insurance or can be purchased alone. The choice is mainly determined by the factors like size of the company where a small sized firm might want to go for a bundle to include employment practices liability insurance along too while a mid to large sized firm would preferably go for a standalone Directors and officer’s liability insurance.
The coverage provided by a Directors and officer’s liability insurance is broadly divided into three categories details about which are mentioned below:
- A-side coverage
Settlement cost, defense cost and judgement cost in situations like bankruptcy is declared by the company are covered under this coverage for the directors and officers and under certain circumstances employees too.
- B-side coverage
When the losses are indemnified by the company, then this coverage covers these for the Directors, officers and employees.
- C-side Coverage
It is also called ‘Entity coverage’ and it basically sets a cap on the protection offered to the directors and officers of a company.
All the coverages provided under Directors and officer’s liability insurance
In this section you will read about all the costs and services that are covered under a Directors and officer’s liability insurance and along with that you will also find about the extensions that are available with these plans. Have a look:
- Payment of behalf of the insured that includes the directors, officers and sometimes employees too, if they are indemnified by the company.
- Loss faced by the insured for a legal claim and found to be legally liable for committing a wrongful act or practicing wrongful market strategies.
- The payments covered also includes the defense cost.
The extensions that are mentioned below might be provided by your insurer and they can be included in the insurance plan. one thing to keep in mind is that it can be the case that your insurance agency of choice might not offer you all of these extensions because these are considered as extra services that are offered at the discretion of the insurance company.
- Executors and Spouses
The services of a Directors and officer’s liability insurance can be extended to include cover for executors, legal representatives of the insured, lawful spouse, heirs and administrators. The catch in this case is that the cover is only provided if the claim is for wrong act of the insured person.
- Previous D&Os
As the name suggests, it extends the cover even to the former Directors and officers of the organization besides the serving ones that are always covered under Directors and officer’s liability insurance.
- External Directorship
It provides the coverage to the insured even in the case he is working outside the entity but only if he is authorized for doing so by the company.
- D&O Insurance
it is not rare that the lawsuits are filed against organizations for releasing toxic chemicals or waste product of their production line in the water bodies like ponds, lakes, rivers, seas and oceans or near the residential areas giving rise to problems for both the environment and the humans. this extension provides cover for the defense cost which is paid for fighting against such lawsuits.
- Policy Term Extension
The coverage period of the policy under this extension can be extended for a pre-specified period by the insurance agency only under conditions that are settled before the inception of the policy.
Case Studies of claims settled under a Directors and officer’s liability insurance in the past
- Road Accidents due to production defects in the Vehicle
In this case, one of the vehicle of a manufacturer was involved in an accident and the driver of the car died. The lawsuit was filed against the company and the directors and employees of the company were interviewed by the police. With further investigations, it was found that there were a number of defects in the production process of the vehicle of which the transport manager of the company was aware of but still didn’t do anything even when the vehicles were running on the road. With investigations, police gathered enough evidence to prosecute the transport manager and the court trials were actively covered by the press for this corporate manslaughter.
The total cost of the claim was 200,000 euros and was paid by the Directors and officer’s liability insurance while the premium of the insurance was only 600 euros.
- Director vs. Director action
This kind of dispute occurs when one of the director of the company tries to intentionally manipulate the actual worth of the company. One of the real case study for this particular instance is of a divorced husband and wife where the husband tried to manipulate the true worth of the company in order to have to pay less to his wife who was an equal director and partner in the company.
The final claim amount in this case came out to be 750,000 euros.
- Satyam Director Liability claim
Frauds and dishonest acts are not covered under Directors and officer’s liability insurance and this case story of Satyam computers is one of these. Satyam computer filed claims with the insurance company after notices from regulatory authorities and class action suits were received to provide cover under the Directors and officer’s liability insurance. the claim amount totaled to Rs. 480 crores under the policy but the insurance company refused to pay for the claims as the lawsuits were filed against directors and officers of Satyam computer were for fraud practices.
As we mentioned in the first line of this article that lawsuits against organizations are not rare these days around the world and due to this reason Directors and officer’s liability insurance becomes necessary for every company having a board committee or an advisory committee contradicting the famous myth that this particular insurance is only meant for the companies that are in public domain. Even simple math reveals that a company can save a large amount if it is insured under a D&O liability insurance because even small claims in case of a lawsuit are larger than usual premiums paid for one such insurance. We hope that you got some useful information out of this discussion because throughout this article, we tried to cover each and every detail about the Directors and officer’s liability insurance and we hope that you also shared the similar opinion.
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