DIRECTORS & OFFICERS INSURANCE:
COVERAGE, BENEFITS, COST, CLAIMS

A Directors and Officers Liability Insurance Policy (D&O) is a type of insurance policy which protects the Directors and Officers of a Company against lawsuits alleging Wrongful Acts committed by them in their managerial capacity. The D&O Policy provides cover for Defence Costs and Damages that the Directors and Officers of a Company become legally liable to pay on account of the financial losses suffered by the third parties due to any Wrongful Act committed by the Directors or Officers in their Managerial Capacity. A Wrongful Act is defined as Breach of Duty, Breach of Trust, Error, Omission, Negligence, Misstatement or Misleading Statement.

So, if a Director or Officer takes a decision on behalf of the Company which goes wrong, a Directors and Officers Insurance Policy will insure the Directors and Officers for the Defense Costs and Damages that they become legally liable to pay. The Coverage includes payment for Court Awards, Defence Costs or Legal Representation Costs incurred by the insured.

A Directors and Officers Insurance Policy is also known as a D&O Liability Insurance Policy or a Management Liability Policy.

WHY DO YOU NEED A DIRECTORS AND OFFICERS LIABILITY INSURANCE POLICY?

In today’s environment, directors are accountable to a wide range of stakeholders, including employees, customers, suppliers, and shareholders, and may face legal action from any of these groups if issues arise. Personal assets can be jeopardized due to business decisions, even though these choices—such as those related to expansion, hiring, or investments—are made on behalf of the company and intended to benefit its stakeholders.

Should these decisions lead to unfavorable outcomes, directors and officers could be held personally liable, potentially exposing their personal assets to risk following an adverse judgment. To enable directors to make decisions with confidence, it is critical for the company to offer indemnity protection. A D&O Liability Insurance Policy provides coverage for defense costs and damages, safeguarding directors and officers against liabilities arising from managerial decisions that may not succeed.

WHAT DOES A DIRECTORS AND OFFICERS LIABILITY INSURANCE POLICY COVER?

A D&O Policy provides cover for a range of Wrongful Acts as discussed. Common D&O Lawsuits arise because of the following:

Breach of Fiduciary Duty: Directors and Officers of a Company have a fiduciary duty to act in the best interests of the company and shareholders. Shareholders of a company may sue the directors and officers for Breach of Fiduciary Duty if any of their actions are deemed to be in violation of the fiduciary duty.
Mismanagement: Shareholders of a Company may sue the Directors and Officers for mismanagement if any of their actions results in financial losses for the shareholders.
Employment Practices Liability: Employees of the company may sue the directors and officers of a company for Employment Practices Violation such as Wrongful Termination, Discrimination, Harassment etc.
Securities Violation: Shareholders may sue the Company for violation of security laws
Misstatement or misleading statement: Shareholders may sue the directors and officers of a company for a Misstatement or a Misleading Statement if they provide a false or misleading information about the company’s financial position.
Regulatory Authorities: Directors and Officers of a Company can also get sued for regulatory violations.

WHAT IS A D&O POLICY STRUCTURE?

A D&O Insurance Policy would cover the Legal Defence Costs and any liability or penalties arising out of wrongful or negligent act, Breach of Duty or Misstatement for the Directors and Officers of the Company covered under the Policy. The D&O Policy has provisions to cover Non-Executive Directors, Independent Directors and Retired Directors of the Company as well. The D&O Coverage includes payment for Damages awarded by the Court, Defence Costs or Legal Representation Costs incurred by the Insured.

A Directors and Officers Liability Insurance Policy provides cover under 3 Sections:

Side A Cover
Side B Cover
Side C Cover

WHAT IS SIDE A, SIDE B, SIDE C COVER UNDER A D&O POLICY?

Side A Cover of a Directors and Officers Liability Insurance Policy covers Non-Indemnifiable Claims. Non-Indemnifiable Claims means claims which are not payable by the Company. There could be certain situations where the companies are restricted by law and cannot provide Indemnification in certain types of allegations.

For Eg: If there are allegations of any type of fraudulent activity committed by the Director, the Company may not be allowed to indemnify such Directors or Officers. Another situation could be if the Company is facing a financial crunch. So, if the Company does not have money to back their Directors and Officers, in such circumstances, the Directors and Officers will have to pay the expenses from their own pocket, and subsequently the Directors and Officers Insurance Policy will provide reimbursement for Defence Costs and Damages directly to the Insured Directors and Officers. One advantage of Side A Cover is that it has Zero Deductible.

Side B Cover under a Directors and Officers Liability Insurance Policy covers Indemnifiable Claims. Under Side B Cover, the claims are also against the Directors or Officers as under Side A Cover, but here the claims are indemnified by the Company. This means that the Company is paying expenses on behalf of the Directors and Officers and then subsequently asking for the reimbursement from the Insurance Company.

Side B Cover also has deductible unlike Side A Cover which has Zero Deductible.

Side A and Side B covers Directors and Officers of the Company whereas Side C Cover under a Directors and Officers Liability Insurance Policy deals with claims against the Company.

Claims against the Company under Side C Cover of a Directors and Officers Liability Insurance Policy deals with 2 situations: the Employment Practice Liability Insurance (EPLI) Section and the Shareholders Claims or the Security Claims Section.

You can read our detailed blogpost on Side Coverages in a D&O Insurance Policy .

WHAT TYPES OF BUSINESSES NEED TO PURCHASE A D&O LIABILITY INSURANCE POLICY?

A D&O Insurance Policy is important for all types of companies ranging from Startups, Small Companies and even large companies. The coverage requirement in a D&O Liability Insurance Policy for different companies will differ depending on the size of the business.

D&O Liability Insurance Policy for Startups
- A D&O Liability Insurance Policy is very important for Startups for the below-mentioned reasons:
- Access to Funding: Startups which want access to private equity or venture capital funding need to purchase a Directors and Officers Liability Insurance Policy. This is because the VC and PE firms will be joining the Startup’s Board of Directors as investors, and consequently they would be exposed to liability if the Directors and Officers of the Startup get sued. Thus, the VC and PE firms mandate the Startup to have a D&O Policy before they approve the funding round and agree to join the Board of Directors.
- Attracting Talent: Having a D&O Policy allows the Startup to attract top quality talent, particularly at the leadership level. Executives would not want to put their personal assets at risk and hence they most likely do not agree to join a startup without a D&O Insurance Policy in place.
D&O Liability Insurance Policy for Small and Medium Sized Businesses
- Small and Medium Sized Businesses are also exposed to litigation from customers, vendors, suppliers, regulators and competitors. A costly lawsuit might mean that the company can go in distress. Additionally, the personal assets of Directors and Officers are also at risk in case of a huge D&O Claim. Thus, all small and medium sized businesses should protect themselves with a D&O Insurance Policy.
D&O Insurance for Large Businesses
- Large companies are most at risk. Today, lawsuits from disgruntled shareholders and employees are commonplace. Given the size of the business, it is impossible for directors and officers to have oversight on everything. It is very likely that something goes wrong at some place and the Directors and Officers end up getting sued as a result. Thus, a D&O Insurance Policy is a must for large businesses.

WHAT ARE THE BENEFITS OF A D&O INSURANCE POLICY?

The benefits of a D&O Liability Insurance Policy are as follows:

Protection of Personal Assets: A D&O Insurance Policy protects the personal assets of directors and officers against potential lawsuits. In absence of a D&O Insurance Policy, the personal assets of directors and officers can be at risk.
Coverage for Defence Costs: Defending against lawsuits in courts entails substantial expenses in terms of lawyer’s fees, court costs and related expenses. A D&O Insurance Policy provides cover for Defence Costs, which can be substantial.
Risk Mitigation: A D&O Insurance Policy also helps in risk mitigation for companies by providing coverage for Claims of Wrongul Acts such as Breach of Fiduciary Duty, Error or Omission etc.
Peace of Mind: A Directors and Officers Liability Insurance Policy offers peace of mind and allows them to make decisions without worrying about financial consequences

WHO IS AN INSURED UNDER A D&O LIABILITY INSURANCE POLICY?

An Insured under a D&O Policy is:

any natural person who was, is or during the Policy Period becomes:
a director or officer, but not an external auditor or insolvency office[1]holder of a Company;
an employee of a Company;
a de facto director or prospective director named as such in any listing particulars or prospectus issued by a Company;
an Outside Entity Director; but only when and to the extent that such Insured Person is acting in such Insured Person capacity;
Insured Person is extended to include:
the spouse or domestic partner (including same sex relationship civil partnerships, if applicable); of an Insured Person and
the administrator, heirs, legal representatives, or executor of a deceased, incompetent, insolvent or bankrupt estate of an Insured Person

WHAT IS A WRONGFUL ACT IN A D&O LIABILITY INSURANCE POLICY?

A Wrongful Act in a D&O Policy is defined as

(i) with respect to any Insured Person:
- (a) any actual or alleged:
  - Act, Error or Omission,
  - Breach of Duty,
  - Breach of Trust,
  - Misstatement or Misleading Statment
  - Breach of Warranty of Authority
- (b) Employment Practices Violation
(ii) with respect to any Company,

any actual or alleged act, error or omission by the Company, but solely with respect to Securities.

WHAT ARE THE DUTIES OF DIRECTORS AND OFFICERS?

Directors and Officers of a company have 2 primary responsibilities to adhere to while executing their duties:

Duty of Care: Directors and Officers need to perform their duties in good faith and should exercise care that a reasonably prudent person in a similar situation and circumstances would exercise. They are also expected to exhibit professionalism and take decisions in the best interest of the company they work for.
Duty of Loyalty: Directors and Officers of a Company should refrain from using their positions to further their own private interests or engage in activities that harm the interests of the company they work for.

Directors and Officers can get sued for Breach of these duties

WHO ARE THE POTENTIAL CLAIMANTS UNDER A D&O POLICY?

A Director or Officer is personally liable for his/her actions and failure to act in that capacity which puts the personal assets of Directors or Officers at risk. In today’s times, the Directors and Officers of a Company are at risks of being sued through various avenues.

Some common cases where D&O insurance could be useful are as follows:

Employee Related Cases where an employee sues directors for wrongful termination, discrimination, sexual harassment etc
Customers can sue the Company in courts for misleading claims in advertisements and wrongful trade practices.
Directors of a company may be held accountable by the Regulatory Authorities if a Company does not pay its due taxes. The Directors could be levied punitive fines in such cases.
Shareholders may bring a lawsuit against the Company and its Directors, if any action of the Board results in a fall in share price leading to shareholder losses. Misrepresentation of facts and financial information in prospectus or leaking of confidential data could also result in lawsuits

A D&O Liability Insurance Policy insures the Directors and Officers of the Company from legal actions initiated against them by Employees, Customers, Shareholder etc.

WHAT ARE THE KEY FEATURES OF A D&O INSURANCE POLICY?

The Key features of Directors and Officers Liability Insurance Policy are as follows:

Advancement of Defence Costs:
- All D&O Liability Insurance Policies offer Advancement of Defence Costs as a key feature. Advancement of Defence Costs means that the Insurance Company will not wait for the Final Judgment before starting to pay the Claims Expenses. The Insurance Company will start paying those Defence Costs as soon as the Insured starts incurring them.
Right to Defend Cover:
- Liability Policies are of 2 types: Duty to defend and Right to Defend.
- Right to Defend means that the Insured Party has the right to select its own lawyer with the consent of the Insurance Company and go ahead with the litigation. There is a reason why Financial Line Policies especially the D&O Policies, have a Right to Defend Form. Imagine if there is a claim on the CEO of a big company in India. The CEO would prefer a reputed lawyer to defend him rather than a lawyer selected from a Panel of Lawyers appointed by the Insurance Company under the Duty to Defend form of the Casualty Liability Insurance Policies. Right to Defend Form is one of the important features of the Directors and Officers Liability Insurance Policies.
Claims Made Principle:
- The Claims Made Principle says that the Claims should be made and reported to the D&O Insurance Company during the Policy Period. Many times, the Insured does not inform the Insurance Company about a Claim Circumstance which might lead to the Claim getting rejected.
Coverage for Subsidiaries:
- D&O Liability Insurance Policies also provide Coverage for Subsidiaries. Also, if the Insured Party adds any new subsidiary during the Policy Period, for a certain threshold of something like 20% of the consolidated asset size of the Insured, the Subsidiary gets automatically added in the Policy without any requirement of approval from the Insurance Company.
Outside Directorship Cover
- Another important feature under the Directors and Officers Liability Insurance Policy is the Outside Directorship Cover.There are times when the Insured Company purchases a 5%-10% stake in another company and asks one of their directors to go and sit on the board of the Investee Company. The Director of the Insured Company who is sitting on the Board of the Investee Company is covered against any claim on the Directors and Officers of the Investee Company by the D&O Liability Insurance Policy of the Investor Company.
- For eg: Consider a company ABC Ltd. which has purchased that 15% stake in XYZ Ltd. ABC Ltd has nominated one of their directors to go and sit on the board of XYZ Ltd.
- Now, if there is a D&O Liability Claim on the Directors and Officers of XYZ Ltd and if that XYZ company does not have a D&O Policy, the Director of ABC Ltd who is sitting on the board of XYZ Ltd, will also get sued because the entire Board has got sued for that particular D&O Claim. In such a case, the DNO Liability Insurance Policy of the ABC Ltd will provide protection to that outside entity director. It will not provide protection to any other director, but only the outside director of ABC Ltd, who has been asked to go and sit on that board of XYZ company.
Cover for Retired Directors - Lifetime Cover:
- A Directors and Officers Liability Insurance Policy provides Lifetime Cover to the Retired or Resigned Directors along with the Current Directors as well. This is an important cover since Directors can also be sued after retiring for decisions they took while they were working.
Regulatory Crisis Response Cover:
- D&O Liability Insurance Policies are seeing a lot of Regulatory Claims where there are a lot of investigations against the Directors and Officers. When there is an investigation against the Director or Officer, they have to hire a lawyer to defend themselves, or probably a chartered accountant or auditor to present the case.
- In such circumstances, all those Professional Fees which are charged by these Professionals or Organisations are covered under the Regulatory Crisis Response Cover.
Emergency Costs:
- Another important feature of a D&O Liability Insurance Policy is its provision for Emergency Costs. Any Liability Insurance Policy does not allow the Insured Party to accept any liability or to make any payments in any claim without the consent of the Insurance Company.
- But there are 2 policies: One is the Directors and Officers Liability Insurance Policy and another is the Cyber Insurance Policy, where there is a provision of Emergency Costs. Such a provision is included in the D&O Policy because there could be an emergency situation, wherein the Company or the Directors or Officers are not in a position to take the consent of the Insurance Company before going ahead with the litigation. Such Costs can be covered under the Emergency Costs section of the D&O Liability Insurance Policy.
Public Relation Expenses Cover:
- D&O Liability Policies also provide cover for Damage to Reputation. Sometimes, if there are false allegations against the Company and its Directors or Officers, these allegations may be published in the media which may result in an adverse impact on their reputation. The D&O Liability Insurance Policy provides a Cover for Damage to Reputation or Cover for Public Relation Expenses wherein the Insured Party can hire a PR Firm to refute the false allegations made against them.

WHAT ARE THE ADD-ON COVERS AVAILABLE UNDER A D&O LIABILITY INSURANCE POLICY?

The add-on covers under a D&O Insurance Policy are as follows:

Employment Practices Liability (EPLI) Cover: Employment Practices Liability Extension Cover or EPLI Cover protects the directors and officers of a company against lawsuits alleging Employment Practices Violations such as Wrongful Termination, Sexual harassment, Discrimination etc. The coverage is extended to include Entity. Under the Entity Employment Practices Liability Cover (Entity EPLI Cover), coverage is provided under the Policy even if the employee sues the Company rather than the Individual Directors and Officers for Employment Practices Violation.
Entity Securities Claim: Another Add-On Cover of the D&O Liability Insurance Policy, which covers the Company or Entity is the Securities Claim Extension. This extension covers a claim alleging violation of any laws (statutory or common), rules or regulations regulating Securities, the purchase or sale or offer or solicitation of an offer to purchase or sell Securities, or any registration relating to such Securities.
Inquiry Representation Costs: This extension covers the costs incurred by the Insured Directors or Officers in preparing and approving for a regulatory Inquiry or Investigation into Company affairs.
Spouses and Executors: This Extension extends the D&O Policy Coverage to Spouse or domestic partner and the administrator, heirs, legal representatives, or executor of a deceased, incompetent, insolvent or bankrupt estate, of an Insured Person

WHAT IS THE CLAIMS PROCESS UNDER A D&O INSURANCE POLICY?

The Insured needs to follow the below mentioned steps in order to file a Claim under a Directors and Officers Liability Insurance Policy:

Step 1: Intimate the D&O Claim to the D&O Insurance Company as soon as possible.
Step 2: Submit the necessary details such as Policy Number, Legal Notice Received etc.
Step 3: Submit the documents required for a D&O Claim such as ID Proofs, GST Certificate, Claim Form, Legal Notice etc. The D&O Insurance Provider can ask for additional documents.
Step 4: The Insured can appoint a lawyer with the prior approval of the insurance company to defend him against the lawsuit in courts.
Step 5: The Insurance Company makes the claim payment based on as per the D&O Policy terms and conditions.

WHAT ARE THE COST AND EXCLUSIONS OF A D&O INSURANCE POLICY?

The Cost of a D&O Insurance Policy depends on the following factors:

Firm Turnover
D&O Policy Coverages
Policy Limit and Exclusions
Size of Company and number of directors and officers who need coverage
Prior Claims Experience
Industry to which the firm belongs and level of risk exposure

The major exclusions under a Directors and Officers Liability Insurance Policy are as follows:

Exclusions under a Directors and Officers Liability Insurance Policy
Any Claim due to Willful Misconduct of the Director and Officer is excluded Any Claim due to an Act committed prior to start of the Policy is excluded
Criminal Fines and Penalties are excluded Major Shareholder Exclusion: Claims brought by major shareholders (for eg: Shareholders with more than 15% stake) against the Directors and Officers are excluded

You can read our detailed blogpost on Exclusions under a Directors and Officers Liability Insurance Policy .

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