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D&O Insurance

What happens if a company goes bankrupt with a D&O policy?

By February 24, 2022April 13th, 2022No Comments

A D&O Insurance Policy has several benefits. A business or an NGO can avail its features to save itself against financial obligations. One of the crucial advantages of the policy is it protects the public or private entity during bankruptcy. A company can rely on the policy when it is bankrupt.

Small businesses in India prefer D&O

With each passing day, the importance of D&O insurance policy is increasing among small businesses in India. Even NGOs are depending on the insurance. The extensive benefits of the policy are attractive to several companies. 

What is bankruptcy?

Bankruptcy is a condition when a company is unable to shoulder its financial responsibilities. When the company is bankrupt, it can’t pay to its creditors. The company has to legally declare its status. The D&O insurance policy plays a major role in handling various issues on behalf of a bankrupt company.

Bankruptcy means insolvency

The other term used for bankruptcy is insolvency. When a company or business is bankrupt, it is said that the company has become insolvent in the market. It is no longer in a position to handle its financial obligations. 

The policy should be bought when the company is not bankrupt

Keep in mind to purchase the D&O insurance policy when the company is not bankrupt. The benefits of the policy apply if the company becomes bankrupt during the tenure of the policy. So, the company needs to buy it before becoming insolvent.

The policy clauses tell about the applicability of the insurance

The document of the insurance policy has clear clauses. The details of the clauses tell about the applicability of the insurance in situations when a company becomes bankrupt. The policy document has a clear layout for the applicability. 

When a company is bankrupt

In the situation when the company is bankrupt, it is unable to bear the expenses on behalf of its directors/officers. The directors/officers might have to fight a lawsuit, hiring an attorney. The insurance pays the legal expenses of hiring the experienced lawyer to fight the case.

Protecting the assets of the company

One of the major roles that a D&O insurance policy when a company becomes bankrupt is the insurance effectively protects the assets of the company. The company does not have to worry about leveraging its assets to bear the legal expenses to fight lawsuits.

Knowing the coverage of the insurance

It is extremely important to have clear ideas about the total coverage of the insurance before deciding to buy the policy. The coverage may differ depending on the nature and scale of business, its current financial conditions, and other relevant business factors. 

Read the policy document where it talks about bankruptcy

It should be the priority of the concerned individuals to go through the portion of the policy document that particularly discusses about applicability of the insurance related to bankruptcy status of the company. It helps in understanding the policy in more details.

Premium amount increases with bankruptcy risk

When the risk factor associated to bankruptcy of the company is high, the company has to pay a higher amount of premium to the insurer. On the other hand, if the risk is low, the premium amount the company has to pay is low, too. 

Assessing the current financial status of the business

It is very crucial to do a proper assessment of the current financial status of the company while buying the D&O insurance policy. The assessment gives an overview of the impact of the insurance when the company becomes bankrupt.

Funding the defense costs

Even after the company becomes bankrupt, the policy will take care of all defense costs of the directors/officers facing lawsuits. The clauses of the policy clearly discuss on this matter. The directors/officers do not have to bother about bearing the legal expenses of fighting the case.

Funding the miscellaneous legal expenses

It is also important to check out the types of miscellaneous legal expenses the insurance will cover in cases of fighting lawsuits. The document of the D&O insurance policy mentions the types of miscellaneous legal costs it will take into account on behalf of the directors/officers of the company. 

It is vital to check out the exclusions

When you plan to buy or recommend the D&O insurance policy, do not forget to check out the exclusions as mentioned by the official policy document. The list of exclusions tells about the cases when the applicability of the insurance is not valid. 

Notifying the insurer

It is obvious that when a business files for bankruptcy, it should simultaneously notify about it to the insurer. The dynamics of the applicability of the D&O insurance should be transparent throughout. The insurer must receive the news of filing of bankruptcy by the company.

Retention is an important factor

The retention mentioned in the D&O insurance policy is one of the most important factors taken into consideration. It is the value over which the costs are handled by the insurance. The value is most of the times lesser for private companies, compared to public companies, as public companies run a greater risk of facing lawsuits.

Check out the retention of the policy

When you need to purchase the policy, one of the first things to do is checking out the retention of the policy. Talk to the insurer or broker from whom you plan to purchase the policy

Clear your doubts with the insurer

You may have some doubts when you purchase or recommend a D&O insurance policy to a company. There is no need to remain confused in matters related to the applicability of the insurance policy. Ask questions to the insurer and get rid of confusion, if any. It helps in confidently buying the insurance. 

Gather more valuable information

Discuss with a top insurance broker, PlanCover, to know more about how D&O insurance can help a business during bankruptcy. The agency will provide ample insights that can be helpful in selecting a suitable insurance policy for the concerned company. 

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