Buying a D&O Insurance policy requires some research. You, as the HR head or CA of your company, with a responsibility to recommend the policy to your company, need to thoroughly know about the various terms and conditions of the D&O insurance policy, before making a final decision.
Directors and officers can mitigate the risk of personal liabilities on them through various safeguards. But, the most ideal, and cost-effective mechanism is they obtain the “Directors and Officers Liability” insurance. This will help the directors to safeguard themselves in case of any claim arising from any third party due to their bonafide actions in the company.
In the wake of various corporate scams and initiation of legal proceedings, it becomes very important for the directors to understand their duties and liabilities as a director in the Indian regulatory framework.
Learn about the clauses
It is important to gather as many details as possible regarding the wide range of clauses relevant to the insurance policy. The document will have all the clauses. Read them and check out whether they serve the interest of your company or not.
A company or a group of directors/officers planning to purchase the insurance policy should have a basic understanding about its applicability. There are usually numerous sides associated with the applicability of the D&O insurance policy. The concerned company must know about them.
D&O liability insurance affords protection to directors and officers from liability arising from actions connected to their corporate responsibilities. The policy provides indemnity to the directors and officers in respect of:
- Legal costs in defending proceedings brought against them alleging wrongful acts.
- Any damages awarded to the claimants against the Directors and Officers, including out of court settlements.
Know about the coverage
Arguably the most important part of buying the policy is the amount of its coverage. The policy document clearly mentions it. The company should be sure about the total coverage it specifically requires. Discussing with the insurer on the matter is a wise thing to do.
The meaning of exclusions
Exclusions are exclusive conditions mentioned in the document of the insurance when the policy is not applicable. It means in case of exclusion, the policy will not pay the insurance amount to the beneficiary. One has to keep this in mind before recommending the D&O policy.
There is a list of exclusions
D&O liability insurance is intended to provide broad and sufficient coverage for policyholders and their officers. However, D&O policies do not cover all conduct and many contain a number of notable exclusions. As time consuming as it can be, organizations should always sit down with their insurance broker and review the exclusions contained in their D&O policy.
A broker like PlanCover will help ensure that the organization and their officers understand how their policy works in practice. In many cases, organizations assume they are covered for a claim when, in fact, policy exclusions could apply.
The D&O insurance policy has a well-defined list of exclusions. It is advised to go through the list below before finalizing the policy.
Cases when there is no coverage
The list of exclusions is basically about the specific cases when there is no coverage for the company from the insurer. The exclusions are within the legal framework of the applicability of the D&O insurance policy, too.
Exclusion 1: Fraud
When the company is alleged to have committed fraud with the client or shareholder or with any third party vendor, the insurer does not pay the money to fight the lawsuit. It is clearly mentioned in the list of exclusions.
Exclusion 2: Intentional acts that are non-compliant
There could be lawsuits against the directors/officers of the company accusing them of committing certain unlawful acts. If the insurer finds that the acts are of non-compliant in nature, then it does not have the responsibility to pay the legal expenses on behalf of the company.
Exclusion 3: Illegal remuneration
When the insurance service provider finds that the insured has been involved in matters related to illegal remuneration, it has the full right to deny the coverage to the directors/officers of the company. In situations of personal profits, the exclusion remains valid.
Exclusion 4: Property damage/Bodily harm
When the directors/officers are facing a lawsuit of property damage, the insurance company is not liable to shoulder the legal expenses. Also, when it is a case related to bodily harm, the insured does not get the coverage as mentioned in the deal of the policy.
Exclusion 5: Legal costs before policy tenure
One of the crucial points to note is when there are legal costs yet to be covered, from a period that is before the tenure of the D&O policy, the insurer does not pay for the expenses. The company has to look for some other means.
Exclusion 6: Claims that fall under another policy
It might happen that the company had bought another D&O insurance policy from a service provider. The claims in a lawsuit trace back to the previous policy. Hence, the insurer providing the current policy does not pay for those claims.
Exclusion 7: Claims of any other category of insurance
It is also vital to keep in mind that the D&O insurance policy of a top-rated service provider has no obligation to pay the claims associated to any other type of insurance policy registered under the name of the company.
Exclusion 8: In cases of fines and/or penalties
There might be lawsuits involving the directors/officers of the company that have complex issues of fines and penalties. The insurer has nothing to do with such things. It does not deal with these matters. Amy claims arising from fines/penalties are not covered by the D&O insurance policy.
Exclusion 9: KNOWN CLAIMS AND CIRCUMSTANCES
Due to the claims-made nature of D&O coverage, policies typically do not cover known claims and circumstances. Put another way, D&O policies do not cover claims that should have been reported during a past policy period. Accordingly, all claims and circumstances that an organization is aware of before the inception of a policy are excluded from coverage.
Exclusion 10: PRIOR OR PENDING LITIGATION
This exclusion removes coverage for claims that arise from litigation that was pending prior to a certain date set forth either in the policy declarations or in the exclusion itself.
The pending and prior litigation exclusion date ensures that the insurance company does not have to pay a claim arising from active or pending litigation that an organization knew about before the effective date of the coverage.
Exclusion 11: INSURED VS. INSURED EXCLUSION
D&O policies preclude coverage for claims brought by one insured director or officer against another director or officer also covered under the same policy. The purpose of this exclusion is to eliminate coverage for internal disputes among directors and officers and claims involving collusion.
When you aim to purchase or recommend a D&O insurance policy, it is wise to always double-check the exclusion list of the policy. You will be more confident about purchasing the insurance, or recommend it to an interested entity.