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D&O Insurance

What is the directors’ and officers’ liability and, why is it significant?

By January 14, 2022January 16th, 2022No Comments

Have you heard of Directors and Officer’s liability insurance? The D&O insurance policy is a liability coverage plan that caters monetary support to the executive rank holders of the organization. Businesses, organizations, and all professional brands have a board of directors and executive officers. They have professional duties to fulfil to ensure the proper functioning of the associated organization. If there is mismanagement or misconduct of duties there can be legal cases against them. In such times, the D&O liability insurance provides monetary support to meet the legal expenses.  

Directors and officers can mitigate the risk of personal liabilities on them through various safeguards. But, the most ideal, and the 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 the 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. 

Liabilities of Directors

  • A person is appointed as a director under the Companies Act, however, their liabilities as a director are not limited to the offences committed under the Companies Act. 
  • They can be liable for the offences committed under the various other statutes like the Negotiable Instruments Act, 1881, Labour Laws, GST Act, Income-tax Act etc.
  • Section 166 of the Companies Act, 2013, mentions about the fiduciary duties of the directors which includes that the director should not act in a manner to create any undue advantage either to himself or to any of his relatives.
  • Statutory Liabilities (set forth in Companies Act) – This kind of liabilities are statutory in nature. Government authority can initiate legal proceedings against directors. 
  • Fraudulent business conduct and all associated debts. 

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. 

Understanding the D&O insurance

Like every other business insurance, D&O insurance also has a set of norms and regulations. There are coverage inclusions and exclusions associated with the insurance policy. So, it is crucial to understand the liabilities and then decide if the D&O policy is worth your requirement.

D&O Insurance is a type of professional liability insurance for errors and omissions that a company carries to protect its directors and officers if they are sued. It is D&O Insurance that responds when directors and officers are accused in a civil or criminal court of acting in a way that violates their duties to the stockholders or the law or other third parties.

These days, the D&O insurance policy is a common offering that most leading companies, businesses, and brands offer to their board members and officers. It is part of the risk management regulation of the companies. 

The D&O insurance provides monetary protection and also reimburses costs on managing the legal requirements. If the claims made by the insurance holder fall under the liability coverage rules, they get complete coverage. In cases of exclusions like – fraudulence, criminal offence, etc., there is no monetary support provided by the insurance company. For understanding how the insurance company works in the case of D&O policy, you have to understand what “liability” refers to in this context. 

The violation of “liability”

When an individual is given a high rank in a business or organization, they are obliged to meet their responsibilities and duties. Mismanagement or disregard of professional duty can cost them hugely. They are answerable to the employees, stakeholders, consumers, regulatory body, and their colleagues for their professional obligations. If any such situation arises where the executive rank holder has been found disregarding their duties, they can be sued. Disobedience to the managerial rules and mismanagement of the corporate “liabilities” are the primary reason behind the legal charges. 

A director or the officer in the organization can be charged with a lawsuit for the following violation of responsibilities and liabilities – 

  • Wrongful representation of company or business asset
  • Mismanagement of company fund
  • Violation of legal duties and conduct, bringing ill-repute and loss to the company
  • Non-abidance to corporate laws and regulations
  • Unauthorized access to intellectual corporate asset
  • Lack of corporate governance

The D&O insurance protects the assets of the Directors, corporate officers, and other significant supreme rank holders of the organization. It covers the monetary requirements for legal fees, defense costs, settlement fees, etc., if the director/officer fails to perform their duties and gets charged with a lawsuit. 

Coverage of liabilities – The duty of insurers

The liability insurance provider also has duties to fulfil if the liability claim falls under the coverage regulations. Like any other insurance, there are coverage and non-coverage aspects. If the claim made by the insurance holder is valid for coverage, the insurer has to provide complete support as per the norms of the policy clause. They have to reimburse the amount spent by the officer/director for the defence proceedings. The insurer has to indemnify for the loss or damage incurred by the insurance holder.

The need for the liability policy

Now that you have an idea about the corporate liabilities, address the need for the insurance policy. Anyone may question – why should the company buy such a liability policy if the director/officer has disobliged their duties and responsibilities? According to the New Companies Act, 2013, there are strict laws and penalties imposed on high-ranked officials for mismanagement in their duties. Such regulations can often become a negative obstacle in getting proficient personnel on the high-ranked position. The company should protect and safeguard the supreme executive as a sign of corporate responsibility. 

Just like the director/officer is responsible for performing their duties towards the organization, the organization also takes a prudent step in safeguarding the executive leaders who run the organization. Offering such insurance benefits to the chief executives and directors in the company mitigates corporate risks and attracts qualified personnel for the post. 

Understanding the significance

Everywhere you search, the elementary aim of the D&O liability insurance policy is protecting the personal assets of high-ranked officials. But there are other essentialities as well. It brings able and competent corporate leaders on board. Indian corporate organizations need to buy the D&O policies to eliminate the asset-related risks. It is a value-added service benefit dedicated to bringing financial strength during legal proceedings. 

From the corporate perspective, offering such a liability policy helps in image building. It is also a bad reputation to the company if they cannot support the executive leaders during legal courses caused by external or internal allegations. The company can take a neutral part, by offering such a policy to the director and officer. It serves a dual purpose in saving the company’s name from getting involved while showing support to the director/officer and by providing a financial backup by safeguarding the personal assets of the legally-charged director/executive. 

Experts assisting in each step

Before buying such liability insurance policies, it is crucial to learn about the coverage and non-coverage aspects. It is essential for the buyer and the insurance holder, to maintain transparency. The corporate terms related to liability can be confusing for an outsider, so it is best to consult an expert in the matter.

PlanCover – Answering all the doubts.

PlanCover, the leading insurance broker, provides the most-appropriate plans for D&O liability policies to businesses and organizations. With their proficient and qualified team, get all the answers related to the associated liabilities and their significance. Connect to the team now. 

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