Often confused with management liability insurance, Directors and Officers (D&O) liability insurance is crucial for the vast majority of businesses. A D&O policy provides coverage from legal claims against high-ranking and decision-making individuals in an organization. Often, irate customers can hold the decision-making officials in a company liable, if they have incurred losses due to a service provided by the vendor. This could happen even if the vendors have followed all due processes in servicing the client.
Given the challenges and never-ending list of predicaments that decision-makers face on a daily basis, D&O insurance is instrumental for every company’s risk management strategy.
Basic Primer for D&O Insurance
Coverage provided: Before we get into the nitty-gritty involved with D&O policies, let us first discuss the basic aspects of Directors and Officers liability insurance. A D&O policy covers the costs related to lawsuits such as settlement costs and legal costs, for which the individual will be responsible if the charges against them are found to be legally viable.
Directors and officers liability insurance proves to be beneficial if the decisions of a company lead to financial losses to a third-party. Basically, this insurance is meant to protect the officials in the present even for decisions taken in the past.
Freedom to make decisions: This allows them to make better decisions since they are not worried about their personal assets. Claims made against the management on the grounds of accounting irregularities are covered under a D&O policy. The D&O policy doesn’t just cover the personal liability of company directors, if the company has paid for the claims made by a third-party against their managers/directors — the reimbursement is also taken care of.
If you take a look at most of the conflicts and lawsuits between organizations, more often than not the cases will be filed against the leadership of these organizations. So, it is very important for you to integrate D&O insurance policy within the risk management framework of your company.
A D&O insurance policy is not just important for protecting the assets of the directors itself. Should a third party or someone within the organization such as employees, vendors, competitors or clients sue them for alleged wrongful acts in managing the company, a Director and Officers liability insurance policy becomes important to protect not only their individual assets, but also the assets of their spouse and the people directly related to them as well.
Two-way conundrum that creates the need for D&O Insurance
Directors and officers play an instrumental role in building and scaling a company to new heights. High-ranking individuals who hold decision-making positions act as fiduciaries for the companies, too. They must act with utmost care in their job and demonstrate honesty, loyalty and thoughtfulness in order to do justice with the position they hold.
Apart from this, their acts must be in compliance with the company’s bylaws and government regulations as well. Because the decisions made by them have direct as well as indirect impact over the lives of their employees, stakeholders, vendors, suppliers and most importantly consumers — they are more often than not, liable for the negligent acts or errors they commit.
In many cases, directors and officers are alleged to be directly responsible for the loss of plaintiff. When a situation like this arises, their personal assets are under attack as well. This happens when the officer or director has failed to fulfil his duty, engaged in fraud /theft, or have committed a wrongful act.
In the same way, a company is liable for any negligent acts that their directors and officers might be involved in. That’s why, the companies too, are subject to the claims made against their directors or officers.
That’s where Directors and Officers Liability Insurance can come handy!
Companies can use the D&O liability insurance to ensure that they can attract the best minds for the highest positions. Indemnification is also provided by the companies for any damages or losses that the directors may have suffered as a result of questionable lawsuits.
What makes D&O Insurance a catch for SMEs?
As discussed above, a D&O insurance is needed as part of the risk management strategy in order to protect the personal assets of higher management individuals in the company. The D&O insurance can protect against lawsuits related to breach of fiduciary duties, failure to comply with company’s bylaws, bodily or advertising injury to a third-party and many other serious issues. The D&O liability insurance covers the following costs:
- The settlement costs, legal costs, and other costs of defense incurred by the directors and officers are fully covered in case the company refuses, or is unable to provide indemnification for a certain claim that is being made against the concerned individual. Bankruptcy is the most common scenario where this type of coverage is needed.
- If the company decides to provide indemnification for their directors and officers, the D&O policy is used to cover that cost. The directors & officers liability insurance policy covers the legal costs as well as other expenses related to defense.
- Corporate liability is covered under the D&O policy. Damages and defense expenses incurred because of claims made against the company itself are fully covered with the right policy.
Get started with D&O Insurance, today!
Now that you have a comprehensive understanding of how Directors and Officers liability insurance works, make sure that you use this knowledge and make the right choice.
If you have any further questions, feel free to get in touch with our team. PlanCover will help you to pick the right D&O policy that aligns with your needs and risk management strategy.