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D&O Insurance

Important Clauses in Directors and Officers Insurance in India

Some important clauses of D&O Insurance Policy and their meanings 

When you explore various corporate insurance policies, it is very important to know its clauses. Until and unless you are aware of the clauses of the policy, it will be a gross mistake to buy it or recommend it to a company. A D&O insurance policy has certain broad clauses.

What is the precise meaning of D&O Insurance?

There can be claims against the directors and seniors officers of a registered company, alleging them negligence of duty, beach, spreading misinformation, manipulating data, etc, in their defined managerial capacity. The D&O Insurance Policy provides protection to the directors and officers for these claims. 

The various major clauses

The D&O insurance has some well-defined clauses, and some of the major clauses are:

  • The Allocation Clause: Both the insurer and the insured will mutually agree about the amount of coverage allocated, specific to applicable cases. 
  • The Hammer Clause: The insurer is bound to settle the claims, within the regulatory framework. 
  • The Severability Clause: It mentions about the extent of coverage for a director/officer that will be nullified on premises of false information.

A simple example where a major clause comes into action

Suppose one of the directors enters false information about his assets while filling the details at the time of buying the D&O policy. When the insurer finds the anomaly, it has the right to use the Severability Clause and drastically cutting the limit of coverage for the particular director, depending on the applicability of the insurance and other terms and conditions. 

The policy document mentions the clauses

The policy document of the insurance clearly mentions the clauses. So, you need to go through the details by thoroughly reading the various sections of the document. Do not skip any section or even any point. Each bit of information is valuable.

The clauses tell about the applicability of the insurance

If you want to understand the applicability of the insurance, then you need to understand the clauses of the policy. The clauses are like guidelines that modulate the applicability of the policy in an organized and professional manner. 

Each clause has its sub-clause

Each clause of the insurance policy has unique features. The features of the clause are discussed in the sub-clauses. It is essential to read them. When you go through the sub-clauses, it becomes easier to understand the overall dynamics of the clauses related to the D&O policy.

The clauses fall under the regulatory framework

It is good to keep in mind that the clauses mentioned in the policy document of the D&O insurance fall within the regulatory framework. It is mandatory for any insurer to clearly mention the details of the clauses in the policy document.

The clauses help in corporate risk management

When you operate in a corporate environment, you need to consider certain risks. The clauses are excellent tools that can help in optimizing the strategies to manage the associated risk of running business operations in a competitive atmosphere. The clauses enrich the policy.

It is better to know the fundamental terms

When you have a priority to understand the clauses of the policy, it is always better to know the basic terms associated to the working of the clauses. If you are aware of the meanings of a bunch of insurance terms, it becomes more convenient to purchase the policy or recommend it.

You can hire an expert to explain the policy 

There is no harm in hiring an experienced professional or service provider to explain the different clauses of the insurance policy in a clear language. It helps in understanding the scope of the policy.

Check out the scenarios where the clauses are applicable

You should check out the cases or situations when the clauses of the policy are applicable. There are numerous such cases. Again, the policy document clearly tells about the cases. Take your time to read the document. 

Ask questions about the clauses to the insurer

You must ask relevant questions to the insurer about the different aspects of the clauses before deciding to purchase or recommend the D&O insurance policy to a business. The details you get from the responses will help you to buy the policy.

Allocation clause

One of the major clauses included in the D&O insurance is the allocation clause. Any D&O insurance policy mandatorily has the clause. It is an integral part of the insurance. The clause has specific applicability in covering the legal expenses on behalf of the client if such a situation arises.

The simple meaning of allocation clause

The allocation clause of a D&O insurance policy simply means that an insurer is liable to indemnify a business only for the amount that has been clearly mentioned in the policy. It does not pay anything more than what the policy mentions. 

There can be mentioning of different losses/costs

The insurance policy can mention a wide range of losses/expenses. The insurer, accordingly, assesses the applicability of the clause. When it notes the suitability of covering the expenses mentioned in the policy document, it tries to consider it, discussing the financial aspects with the insured.

You can negotiate with the insurer

There is a scope to negotiate with the insurer as an insured business. It is possible to take into account the costs you have to bear to cover the costs of the lawsuit mentioned in the policy document. The allocation clause gives the insured flexibility to discuss the matter with the insurer. 

The amount is well-defined as per the allocation clause

According to the allocation clause, the insurance amount is well-defined in the policy document of D&O insurance. There is no trace of confusion anywhere. Both parties have full knowledge of the amount. 

Hammer clause

Hammer clause is yet another extremely vital clause integral to the D&O insurance policy. It has its merit, in cases of unique applicability. The document of the policy mentions the details of its functional features. You can ask the insurer about its features before purchasing the policy

The simple meaning of Hammer Clause

It is not difficult to understand the meaning of the Hammer Clause of D&O Insurance Policy. The particular clause provides full assurance of the settlement of claims, favoring the insurer. In other words, the insurer has to compulsorily pay for the claims, according to the policy’s Hammer Clause.

There is a cap on indemnification

The Hammer Clause also places a cap on the insurance amount. The details are mentioned in the policy document of the insurance. Each party has to agree with the limit of indemnification with the regulatory framework of the D&O insurance.

Deciding on the indemnification amount

There are cases when the insured and the insurer discuss about the suitable indemnification amount. Various sides of the case are considered before reaching a conclusion. Interests of both parties are taken into account. The details of the policy have the information about the indemnification amount.

Know more about the clauses from a top broker

PlanCover is a top-rated insurance broker that can help you in understanding the various clauses of the D&O insurance in more details. It mainly operates in the Indian market, serving a wide range of Indian businesses in various domains. It gives you valuable information.

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