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D&O Insurance

What are the Different Types of D&O Insurance Claims with Examples?

Director and Officers liability policy is a business insurance offering coverage for the high-ranked officers and directors in the company. The insurance company pays for the defense costs if the officer or director gets legally charged for these actions or statements. If there is misconduct or wrongful act on their part, violating the corporate duties and laws, they can be charged by the law. Employees, clients, stakeholders, and colleagues can bring legal allegations to the personnel and the associated company. 

The role of D&O policy

The D&O policy comes as a financial stabilizer in such situations. For eliminating the allegations and charges, the executives can take the legal path and restore their honor. The charges for fighting the cases, lawyer charges, and other penalties can be heavy on the personal assets of the high-ranking officials. The D&O policy pays for the charges and asserts their right to defend themselves. The policyholder(director or officer) has to raise a claim for reimbursement to the insurer. If the claim falls under the coverage norms and regulations, they will get the claimed amount. 

Directors and officers are bound by duty towards various stakeholders — shareholders, employees, creditors, customers, competitors, government and other regulatory bodies. 

Any breach or non-performance in the duties can result in claims against them by reason of any wrongful act, actual or alleged, in their respective capacities. 

What Types of Claims Fall Under Director and Officer Insurance?

Entities and individuals may sue directors and officers for many different reasons. The vast variety of claims may account for the frequency of claims. Here is a listing of the common claims that fall under D&O insurance:

  • Negligent management
  • Inadequate disclosure in financial reports or statements
  • Breach of contract
  • Antitrust claims
  • Regulatory claims
  • Breach of fiduciary duty resulting in financial losses or bankruptcy
  • Misuse of company funds
  • Failure to comply with workplace laws
  • Theft of intellectual property and poaching of competitor’s customers
  • Lack of corporate governance

Know the claims that can get coverage

As a potential buyer of the D&O liability policy, you should get a clear idea of the different claims that qualify for reimbursement and get approved by the insurer. While the best way would be to talk to the insurance company directly, you can commonly notice with every insurance provider. Read along and know the different claims in D&O policy – 

  1. Claim for wrongful acts

The corporate duties and responsibilities of the directors and executive rank holders in a company are clear and well-defined. So, if there is a wrongful act committed by the personnel, the impact is quite evident. The wrongful acts can be a conflict of interest, fraudulent statements related to company assets, a breach in corporate laws, unethical conduct or action, and many more. If the director or officer gets legal charges for such actions, they can claim for the expenditure of legal defending course. The D&O policy covers such claims after reviewing the credibility and approval norms.  

  1. Improper management suits

An officer or director of an organization can get legally sued for mismanagement of corporate duties. If the mismanagement of the company’s assets (finance) leads to a loss or financial damage for the clients or shareholders, there can be huge penalties and legal cases. The inefficiency and improper management skills get considered as a breach of corporate responsibility and, thus, they are liable to the people getting affected with financial losses. The D&O policy can cover the defense cost claims in such cases and compensate the extra charges for penalties, settlement fees, and legal fines. 

  1. Errors in judgment

A director of a company is responsible for making vital business decisions. Even if the person is an independent director, they have a crucial role in making significant professional decisions in the long run. Thus, if there is an error in the judgment, consequently a wrong decision made from their end, the outcome can be troublesome. Stakeholders, clients, and even employees can get badly affected by the wrong decision-making. It could further lead to multiple contexts like – misleading information, ambiguous reports, etc. The customers and other stakeholders can sue the decision-maker, during which the D&O policy can provide coverage for the lawsuit. 

  1. Negligence in the corporate duties

Officers are the professionals responsible for the impactful actions taking place in the organization. They supervise and execute the professional tasks that keep the company going or effectively run the business. Hence, negligence of the assigned tasks on the executive officers can invite lawsuits and penalties. It can include acts of professional ignorance like – incomplete annual reports, inefficient supervision, frequent absenteeism at significant corporate events and meetings, irregularity in accounts, etc. They can get legal charges for such actions and, the shareholders or clients can impose penalties. Such lawsuit claims get coverage from the D&O policy

  1. Claims for penalties and legal fines

If there is a civil or corporate criminal fine imposed on the director or officer for disregarding corporate laws or other regulations, the D&O can help in meeting the requirements. If a regulatory body (Government undertaken) investigates the organization, the associated expenses can be high. For example – if the company receives legal charges for violating environmental laws, there can be heavy penalties. In such times, the D&O policy will not only pay for managing the expenses of the lawsuit. But, also settle the fine levied by the government. 

D&O claims – Explained With Examples

  • Misleading information – Suppose an officer in company X did not disclose accurate information about the company’s material facts and assets to the investors. The investors later found out that the company’s financial condition was hitting a bottom-low. Hence, a legal complaint got lodged with three lawsuit charges – misrepresentation of information, common law fraud, and violation of fiduciary duties. In such a case the officer can file a D&O claim to meet the settlement charges and defense cost. 
  • Intellectual property – Suppose an officer in a chemical product-based company X, disclosed the secret product manufacturing formula to someone outside the company. They launched the product, based on the shared intellectual property, that is, the formula of the product. In such a case, the employer of company X legally sues the officer and claims a penalty, based on the charge – of mishandling the company’s intellectual property. The officer can file a claim and get coverage for the settlement charges and defense costs. 
  • A case study – In 2016, a multinational company terminated a chairperson for publicly quoting misleading statements about the company’s financial management. Reports claim that the chairperson mentioned that the management decisions were not financially stable and based on emotional grounds. Such statements harmed the company’s reputation. The shareholders brought a class-action legal suit against the company and directors. In such a scenario, the D&O insurance covered the financial spending of the company and director. The company and its subsidiaries received financial coverage under the different clauses in the D&O insurance that aim to safeguard the interest of the director of a company.  

Case: Fund Management 

Description: Shareholders Vs Board Of Directors

Industry: Financial Services 

Case in brief:

  • Shareholders of a large fund management company filed a case against the funds investment advisor, board of directors and independent directors for violating their fiduciary duty.
  • The allegation made was that the board had approved excess fees in violation of its fiduciary duties. The independent director was also sued for being uninformed and failing to monitor the fees paid to the advisor.
  • The verdict was in favour of the adviser and the director, however defense cost were incurred in excess of INR 65 million.

Case: Selling a Subsidiary

Description: Acquirer Vs Seller 

Industry: Healthcare 

Case in Brief:

  • A medical device company was accused of misrepresentation of financial information by the buyer of the concerned subsidiary.
  • The buyer had accused such misrepresentation had led to financial loss.
  • The verdict was in favor of the buyer and the medical device company had to pay defense cost in excess of INR 25 million and damages worth INR 22 million

Case: Firing of Employees

Description: Dismissing of Senior Employees 

Case in brief: 

  • A MNC company had hired in 2001 two senior bankers and they were made to understand that they were to head the new subsidiary. 
  • The setting up of the subsidiary kept getting delayed which soured relationships between the employees and employers. 
  • The company in 2003 dismissed both of them citing incompetence and absenteeism as the reason. 
  • Both the dismissed employees filed criminal cases for damages of INR 80 crore against all the directors of the company alleging cheating, fraudulent misrepresentations about the job profile, remuneration, failing to fulfil terms of employment contract and defamation by press release. 
  • A prolonged legal battle followed and the defense cost incurred by the directors was advanced to them. 

Know the right information

Many have a misconception that D&O liability coverage is only valid for security and asset-related claims. It is clear from the above pointers that there are variations in claim processing and acknowledgment. But you must know that there are exclusions as well. Lawsuits against illegal actions done intentionally by the high-ranked executives to satisfy personal interest or fraudulence activity do not get a claim approval from D&O policy

Thus, it is essential to know about the claims and exclusions from a reliable source. An insurance expert can be your reliable assistor in such cases.

Find the answers with PlanCover.

The highly reliable insurance broker company in India, PlanCover, is your one-stop resolver for D&O policy-related doubts. Buy the right D&O policy from their end after getting all the essential information related to the insurance. Reach out to their team and find the answers to your doubts. 

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