What is covered under Directors & Officers (D&O) Liability Insurance?
Directors and Officers (D&O) liability insurance provides a protection to directors and officers against a liability arising out of any wrongful act done within the scope of their regular duties. Following are covered under Directors and Officers Liability Insurance –
- Directors and officers taken into employment by the organization and its subsidiary companies
- Independent directors or outside directors
- Organization’s employee acting in a supervisory or managerial capacity
- Claims against the risk managers of the company
- Claims against the organization itself such as securities claims
- Claims against company secretaries
- Claims against the employee who is acting as lawyer of the company
Who is the Director or Officer of a company?
The Directors & Officers means-
- All current, past or future directors, officers, supervisory board members, management committee members, management board members or lawfully elected governors of the company.
- All current, past or future shadow directors or de facto directors or officers of the organization
- Any employee of the company who is the former, current and future corporate general counsel (or of equivalent position) of the insured
- All former, current and future member of company’s audit committee, internal committee of the organization or a member of internal compensation committee
- Any prospective directors whose name has been mentioned in the prospectus issued by the company for a public offering.
What is the difference between D&O and other liability covers?
Other general liability insurance provides a protection to the company against any liability such as property damage, bodily injury, advertising damage etc that may arise during its business operation. This means, its shield for overall liability risk of an organization. On the other hand, Directors and Officers liability insurance provides a specific coverage. It offers coverage to meet the liabilities imposed on the company’s Directors and Officers for any of their ‘wrongful act’ done within the scope of their managerial capacity. However, Both the policies do not cover any intentional acts, fraudulent and criminal acts.
How does D&O insurance work?
Directors & Officers liability insurance provides a liability coverage in below three cases-
- It offers coverage to Directors & Officers of the company against a personal liability that may arise due to the actions or managerial decisions taken during their regular duty. This specifically applies when the company is insolvent and financially unable to indemnify such loss. This is called a side A cover in the policy.
- In case, company has already honoured claims of third party on behalf of its Directors & officers, then D&O insurance will reimburse the covered claims to insured company. This is called as Side B cover in the policy.
- Side C cover in the policy protects the company itself against the securities claims. This specifically applies to listed companies.
When can a company indemnify a director or officer?
A company can incorporate an indemnification clause in its Articles of Association to protect its Directors and officers from a monetary setback that may arise due to below corporate actions or decisions taken by them
- Misrepresentation or misstatement made by the director
- Breach of statutory Duty
- Breach of trust
- Breach of duty
- Breach of warranty of authority
- Error and inattention
Company can indemnify the directors and officers for any such wrongful act committed in their fiduciary capacity.
Why do companies require this insurance?
Year on year, there is an upward trend in the number of legal cases against companies and its directors. For the organizations, it’s vital to have a Directors and Officers liability insurance to safeguard against several risks. Here are few reasons to opt for D&O insurance-
- Dealing with legal actions and litigations is a complex and an expensive affair
- Personal belongings and assets of directors and officers are at risk. D&O insurance helps in attracting talent by giving assurance against such risk.
- Security claims by the investors. Shareholders can file a lawsuit if they believe that the share prices have declined due to a managerial action.
- Customers can also take a legal action for misrepresentation made by director
- Employees can reach out to court and file a case against directors on the grounds of unlawful dismissal and sexual harassment.
- Creditors can take a legal action for not acting in their best interest if company goes bankrupt.
- Regulatory bodies can also initiate enquiry against directors and officers
What is the duration of the policy period?
Duration of Directors and Officers insurance is typically for a year. Coverage is provided in the policy is based on the claims made during the policy period.
Should public companies opt for D&O policy?
Yes. It’s very crucial for public companies to have Directors and Officers Liability insurance as they are exposed to the larger risk, specifically for the major two reasons mentioned below-
To protect the company from securities claims: Shareholders are aware of management’s responsibilities and their rights as an investor. They invest with the expectation of receiving good return and can take any legal action to protect their share. If they feel, market value of company’s stock is falling drastically due to any of the wrongful managerial decision, they can reach out the court. D& O insurance also provides coverage for lawsuits arising out of sale and purchase of company’s shares.
To keep its Directors and Officers protected: While serving on the board, they could face host of legal battles which can turn out to be a costly affair.
How much cover should the company opt for?
Amount of coverage that the company should opt depends on the its size, scope of its business operation, Type of shareholders and number of shareholders of the company, current financial situation etc. Company should also consider its ability to fulfil indemnification obligations on behalf of its directors and officers for the claims made by third party. Arriving at the right amount of coverage limit is quite complex task as it’s based on many factors. Expected growth and future prospects of the company also needs to be considered to get the limit of liability right.
What is an allocation issue?
Allocation in D&O insurance means ascertaining the amount of settlements or defence costs attributable to covered claims against both insured and uninsured persons. Allocation issue arises when the claim includes both covered and non-covered matters. In such claims, costs will be allocated between the covered and non-covered losses. Such allocation is mostly done based on legal liability and the relative exposure of both the parties involved.
What is meant by 'claim made insurance'?
Claim made insurance is a type of insurance that provides coverage on claims-made basis. That means, the coverage for a policy triggers only when the claims are made against the insured and reported to insurer while the policy is in force. This is irrespective of the time when wrongful act was committed which gave a rise to particular claim.
If the company goes bankrupt what happens to the insurance policy?
Bankruptcy or insolvency of the company does not relieve the insurer of their obligations. Specifically, in case of Directors and Officers insurance policy, Side A coverage extends a protection to directors and officers against the liability that may arise due to any ‘wrongful act’ even when the company becomes insolvent and cannot execute indemnification obligation. However, it’s important to ensure there is enough side A limit to cover the liability.
Can I opt the same policy for my subsidiary companies?
Yes. You can opt the same policy for subsidiary companies also. There is a provision to automatically include the newly acquired or created companies under the same policy.
Why don’t companies simply indemnify their directors and officers?
Usually, companies incorporate an indemnity clause in their Articles of Association to protect their Directors and officers. However, sometimes these liabilities can adversely affect company’s financials due to unfavourable economic and political conditions. Companies may not be financially able to indemnify their directors and officers. In such cases, personal assets of directors and officers are at risk.
What is a hammer clause
Hammer clause is a provision found in Directors and Officers liability insurance. Most of the policies require insurer to seek a consent from the insured before settling a claim for specific amount. However, if the insured does not provide a consent and insurer believes that the settlement is in the best interests of both the parties, then an insurer can invoke a hammer clause. This clause enables insurer to force the insured into an unappealing settlement by putting an upper cap on the amount of indemnification that the company is willing to provide. Basically, this clause is to protect both insurer and insured during the settlement of claim.
Can my insurer cancel the policy during the tenure
All Directors and Officers liability insurance policies can be cancelled by either the insurer or the insured with a prior notice. In case, insurance company wants to cancel the policy, it can do so by giving 30 days’ notice in writing to the insured’s communication address. In such scenario, insurer will refund the premium on pro-rata basis provided there is no claim reported under the policy till the period of cancellation. There will not be any refund if claims are made during the policy period.
What is an 'insured versus insured' exclusion
Insured versus insured exclusion in directors and officer’s liability insurance prevents a claim made against the director and officer by another director or officer or by the institution defined in the policy. Basically, the motive of the exclusion in the policy is to remove coverage for some specific situations such as – claims for internal disputes, employment practices claims, claims involving conspiracy and claims against directors and officers by the organization itself for their incautious business practices. D&O insurance policy is designed to cover the claims made by the third party against directors and officers and excludes the claims made by the insured themselves.
How can the insured defend a fictitious claim
Defence costs incurred for any claims are typically covered by the Directors and officer’s liability insurance. That means, even for the fictitious claims made, insurer advance the defence costs to a director or officer accused of such claims on the basis of presumed innocence. The exclusion for such coverage will be triggered under the Directors and Officers liability insurance on admission of guilt of wrongful act or on formal court ruling.
How many people can be insured under the same policy
Number of people that can be insured under the single policy lies on the amount of coverage that you are opting as it works on the basis of collective limit. A company can include its directors and officers and also its subsidiary company’s directors and officers under the single policy.
Does this policy apply for SMEs
Yes. The policy applies to SMEs also as directors and officers of all the companies are at risk of claims, be it a small or large. Directors and officers of SMEs can also be held responsible for their managerial actions and decisions if they don’t comply. Cost of legal litigations can turn out to be very expensive and directors and officers may face loss of personal asset due to such claims. With the increasing risk of data breach and cyber-crimes, it’s important for SMEs to opt for Directors and Officers liability insurance
Are there any extension available on this policy
As Directors and Officers liability insurance is a claims-made policy, it offers an option to buy extended period for claims reporting which is also termed as ‘Extended Reporting Period’(ERP). In case this option is selected by the insured, claims that are reported to the insurer even after the expiry of the policy and during the extended reporting period are covered. Usually, this applies in the case of cancelled or non-renewed policies. Period of extension may be given up to 72 months.
What are Excluded Business Categories
Some of the insurers exclude few business categories in their Directors and Officers liability insurance. Category of business excluded vary from one insurance company to another. Few of the categories that are excluded by the insurers are political organization and non-government bodies, construction companies and businesses related to construction, media and advertising companies, financial institutions, banks and companies which do not have registered office in India etc.
What are the liability capacity set by insurers
Insurer sets the liability capacity across all types of claims in the form of aggregate limit. The amount that the insurer is willing to pay is the aggregate amount across all type of coverage- which includes Side A, Side B and Side C. Hence the liability that can be covered is limited to the extent that the aggregate limit is exhausted. Insurance company will have no further obligations with respect to the pending claims once the collective limit is exhausted.
What is the limit for cover for D&O
The right limit for D&O cover that a buyer needs depends on various factors. The entire thing lies upon the cost consideration and risk tolerance. There are few elements like scope of business, size of the business, liability exposure, category of business and the industry type etc are to be considered while analysing the limit of coverage needed for the organization. Limit selection in Directors and officers liability insurance is the challenging and complex task.
What claims are covered in the policy
Directors and officer’s liability insurance basically covers costs related to investigation, defence, negotiation and settlement of all the covered claims. D&O policy provides a protection in three forms of coverage-
- Side A – Coverage for Directors and Officers Liability- Under this, Directors and officers are provided protection against the claims arising out of any ‘wrongful act’ made in the scope of their managerial capacity, specifically when the company is financially unable to indemnify them.
- Side B – Corporate reimbursement – Under this, insurer reimburses organization for the claims paid by it to the third party while defending its management.
- Side C – Coverage for securities claims – under this, insurer covers the claims made against the organization as a result of sale or purchase of its securities.
What are the exclusions of this policy
Even though D&O insurance has a broad application, it excludes certain claims. Here are the few exclusions of the policy-
- Known Circumstances and claims
- Criminal, Dishonest and fraudulent conduct
- Risks that are covered by general liability insurances such as bodily injury and property damage etc
- Insured verses insured- directors and officers of the company suing each other or the insured company suing its directors and officers
- Catastrophic events such as war, nuclear events and environmental damage.
Who is covered under the policy
The D&O policy covers the following-
- Directors and officers employed by the company
- Directors and officers of its subsidiary companies
- Any other employee of the company acting in the capacity of lawyer to the organization
- Independent and non-executive directors
- Risk manager of the company
- Any employee acting in supervisory and managerial capacity for the company
- Company secretaries
- Entity itself against securities claims. This specifically applies to publicly traded companies who are at the risk of securities claims
- Entity itself for employment claims
Is the coverage different for Not-for Profits organisations
D&O liability insurance policy indemnifies the directors and officers of not-for profit organizations just like for any other organization. It gives them a coverage against the liability arising out of various wrongful acts during their duties. It also reimburses the indemnification that they are supposed to provide to their directors and officers as stated in their bylaws and state laws. Legal litigation covered can be of various range such as allegations of faulty decisions, sexual harassment and improper use of contributions made by donors etc.
What charges are covered by a D&O policy
Directors and Officers liability insurance covers the defence costs, administrative costs, investigation related charges and costs related to negotiation and settlement of any claims made against the company and its directors and officers responsible for the managerial decisions. Some of the charges covered under D&O policy are-
- Charges for breach of conduct: Any actual and alleged breach of conduct such as sexual harassment can put the reputation of company in trouble. D&O policy provides cover for such allegations.
- Charges for breach of employment:Sometimes, directors and officers may have face the legal charges on the grounds of discrimination and wrongful termination. Directors and officer’s liability insurance covers the cost of such lawsuits.
- Litigations due to insolvency:Creditors can take legal action when could not repay them. D & O policy covers the legal fees incurred for lawsuits raised due to bankruptcy.
- It also covers charges related to lawsuits that may arise out of directors and officers misleading statements, neglect and error and due to wrongful trading.
What are the layers to the coverage
Directors and Officers liability insurance coverage can work in three ways which is also termed as sides. That means, these sides can be structured in many ways to make it a D&O package. Below are the basic three layers of coverage that the policy offers-
- Side A: This layer of coverage provides protection to directors and officers directly if they are sued for any wrongful act that they have made within the scope of their regular duty, specifically when company cannot indemnify them.
- Side B: This layer compensates the company for the claims paid it to the third party on behalf of directors and officers.
- Side C: A layer that provides protection to entity itself. This applies specifically for the cases of securities claim and other claims that are not covered under general liability insurance.
What claims against companies are covered by a typical D&O policy
In securities related matters, companies are not covered for their own liability. Side C coverage in directors and officer’s liability insurance covers the entity itself from the lawsuits arising out of sale and purchase of its securities. Shareholder’s litigation against company and its management are covered in the policy. Basically, D&O policy coverage for an entity is limited to securities claims.
How can I decide the scope of the coverage
To decide the scope of the coverage, you need to consider certain things mentioned below –
- Know your insurer-choosing an insurer with experience and credibility is the most important to thing to experience smooth claim processing.
- Know coverage offered by the policy. Policy wordings can be different among insurers. Read every clause carefully
- Have an idea of exclusions of the policy
- Understand each terms and conditions of the policy
- Extensions of coverage
- Period of policy and scope for extension.
How is the limit of liability applied to a claim
Limit of liability is the maximum amount of protection that an insurer has agreed to give during the policy term. Limit of liability is chosen by the insured. That means, it’s a level of protection chosen by insured company and its board for any claims arising out of wrongful act during the course of their duty. Limit of liability works on an aggregate or collective basis irrespective of the number of claims, types of claims and number of people insured. This limit is in addition to the deductible or the retention paid by the insured. Insurer is obliged to pay only till the limit liability gets exhausted. Any costs exceeding this limit of liability will not be paid by the insurer.
What will a D&O policy usually not cover as loss or damages
Directors and officer’s liability insurance do not cover few losses. Below are some exclusions under D&O policy-
- Bodily injury claims
- Property damage claims
- Claims arising out of wilful violation of statute, fraudulent and criminal acts
- Prior or pending legislation
- Personal profiting
- Insured versus insured claims
- Criminal fines and penalties
- Illegal compensation
What happens to my coverage if my company is merged with another
Company’s corporate structure do change with the merger and acquisition activity. Like any insurance D&O policy is also a contract which is established based on the disclosed information. Hence, in the case of merger, these policies operate based on ‘change in control’ clause. If merger takes place during the term, policy remains active with limiting its coverage to the directors and officers for their wrongful acts that occurred prior to the ‘change in control’. This means, anything that goes wrong after the change in control is not covered.
Is corporate manslaughter covered in the policy
Yes. Corporate manslaughter is covered under the directors and officer’s liability insurance policy. In this, corporate manslaughter claims refer to the claims against directors and officers of the company arising out of an event that causes one or more fatalities in which organization is implicated or alleged to have played some role.
Does this insurance cover all the employees at executive level
Directors and officer’s liability insurance covers the key managers and executives of the organization and not all the employees. This policy is basically meant to cover the defence costs arising out of any wrongful acts made by company’s directors and officers within the scope of their managerial duties. It is to ensure key executives and managers of the organization can make managerial decisions without having to worry about losing their personal assets.
Are the legal heirs and representatives covered under this policy
Yes. Directors and Officers liability insurance provides coverage for legal heirs and representatives of directors and officers in case insured becomes incompetent, insolvent or dies. In some cases, directors and officers consider transferring ownership of their personal asset to spouse, legal heir and representatives to keep it safe from effect of lawsuits. In such cases, one can seek D&O policy extension to ensure legal heirs and representatives holding the ownership of assets can be protected if they were dragged into the claim. However, the policy limits its scope to the repercussions of an executives act only.
Will the policy pay my entire litigation charges
What aspects will it cover
Directors and Officers liability insurance policy wordings differ among insurers. The main reason of the policy is to provide protection against the litigation charges regarding the individual allegations on key executives of the company for their decisions take on duty. However, when it comes to paying the charges, policy has many provisions that can impact the scope of defence cost that can be provided. Most of the policies contain ‘allocation provision’ which addresses claims of both covered and non-covered parties where costs are paid on allocation basis. Scope of charges covered also depends on policy’s definition of defence cost.
In most of the cases it covers aspects like charges, fees, expenses and necessary costs incurred and legal representation cost incurred by you while defending the claim.
What is the time limit of legal dispute for which claim is payable
As Directors and Officers liability insurance is a claim made policy, only claims made and reported to the insurer during the policy period is payable by the insurer. However, most of the claims made policies also offer retrospective coverage which is basically unlimited. This means there is no time limitation on the occurrence of wrongful act, it’s just that insured needs to satisfy the notification obligation. Insured needs to report the claim to the insurer during the policy period.
Is there a coverage flexibility for this policy
As most of the insurers are more flexible with policy wordings, directors and officer’s liability insurance can be structured as per the specific needs of the insured. Policy coverage can be opted in many layers too. Along with that, one can opt for extension coverages and also opt for extended reporting period. Coverage can be selected on the nature of business, size of the entity, the industry type in which it operates and many more aspects.
My company is in a legal dispute for the past 12 years; can I claim for the entire period
It can be claimed only if the company has afforded retrospective coverage which is typically for unlimited period. However, sometimes an underwriter can put an exclusion on retrospective date. The retrospective coverage can be limited to the claims that have aroused only after a specified retrospective date. This could be case specific, especially when companies operating for long without Directors and Officers liability insurance, applies for their first policy.
What is the minimum premium limit for this policy
In case of Directors and Officers Liability insurance, premium calculation is done on case to case basis depending upon liabilities exposure risk. There are many factors such as amount of protection coverage selected by the insured, past and current functioning of the company, degree of risk exposure, size of the organization, nature of business and the profile of the company’s directors and officers etc are considered for determination of premium rates.
What factors are considered for fixing the premium for a policy
Premium is fixed on the basis of various elements. Such as-
- Profile of the insured organization
- Amount of coverage selected
- Current and prior functioning of the company
- Financial position as per balance sheet and annual report
- Degree of risk exposure etc
What are claims made and occurrence based policies
Claims made policies cover all the claims that are reported during the time when the policy is effective, irrespective of the time of occurrence of events or wrongful act that gave rise to claim. On the other hand, occurrence based policies cover the claims that are raised out of wrongful acts that took place during the term of the policy. That means, claims made during the policy term may not be covered if that claim pertains to wrongful act that took place when policy was not effective.
When should a circumstance or claim be reported
Directors and officer’s liability insurance policy requires the insured to report the circumstances and incidences that could lead to claims in future against them. Specifically, such report of facts and circumstances has to be done by insured within the period of the policy. Insurer is obligated to cover the potential claim or circumstances reported by the insured. In case the policy has extended reporting period, insurer allows the insured to make claim notification during that continued period. Failing to notify the circumstances and claims on time within the specified can affect the coverage and claims can also be denied by the insurer.
What is the difference between a notice of circumstance and a claim under the D&O policy
A notice of circumstances is nothing but reporting a potential claim to insurer, which means a fact or circumstances that could potentially lead to claim against the insured in future. Insured is required to report such incidents and circumstances as soon as they occur to insurer. On the other hand, claim is a formal request made in writing to the insurer or any arbitral proceeding or any formal administrative and regulatory proceeding. A typical director and officer’s liability insurance requires insured to report and file the claim within the policy period.
Does my insurer provide or select the defence counsel to represent the insured
Or can I choose the law firm of my choice
Normally, Insured is responsible to select the defence counsel to represent its case. Insured is also required to provide all the details pertaining to the law firm chosen in writing to the insurer. Insured is also required to give details of budget and proposed billing rates of its law firm to the insurance company. However, insurance company can suggest about suitable defence law firms only on request from insured. Any Director and Officers liability insurance policy does not necessitate the insurer to select the defence counsel to represent the insured.
What are the sources of D&O claims
Company and its directors and officers are exposed to claims from various sources. Some of the common sources of claims are-
- Shareholders: Its quite common for key executives of the companies to face the claim from shareholders during managerial activities like release of annual report, merger and acquisition etc if it is not perceived to be in the best interest of the company and its shareholders.
- Creditors:If the organization becomes insolvent, its board of directors can be held liable for unpaid debts on the grounds of not disclosing company’s financial position to its creditors.
- Employees: Claims such as sexual harassment, wrongful dismissal, defamation and constructive termination can come from employees.
- Competitors: Competitor of the organization can also claim against its key executives on the grounds of anti-competitive behaviour, breach of intellectual property and misappropriation of trade secrets.
- Customers: customer can also litigate on the grounds of unfair selling, quality of services etc.
- Government and regulatory authorities: Directors and officers can also be held responsible for not being in compliant with the industry regulatory requirements and government legislation.
- An organization itself:entity can itself be exposed to securities claims.
What happens if the claim is not reported on time
Reporting claims on time within the policy period is one of the key requirements of Directors and Officers liability insurance policy. Insured is required to report the facts and circumstances that could potentially lead to future claims. Acting in untimely manner may result in loss of coverage. Some of the insurer may provide post policy window of up to 90 days to report the potential claim.
Can I claim for my previous litigation expenses in the new policy
Most of the Directors and officer’s liability insurance will have prior or pending litigation exclusions. Under this, policy excludes the coverage for previous litigation that were commenced before the date specified in the policy. Hence, under this exclusion clause, previous claims expenses are not covered as the claim may have already been reported in the previous policy.
Can I take more than one policy
Yes. Directors and officers liability insurance can be structured in many layers with more than one policies. This excess of insurance written over the top of the primary layer that works on the basis of ‘follow form’. That means, excess insurers obligation to cover the loss will attach only after the primary insurer exhausts its limit.
What are some common types of D&O claims
Here are few common D&O claims
- Breach of fiduciary duty: claims may arise many sources such as from shareholders, creditors and customer etc. shareholders may claim for loss of share value due to ‘wrongful act’ ornegligence on part of directors and officers. Creditors may hold board responsible for not identifying and evaluating company’s financial position in case of payment defaults.
- Directors and officers not adhering to by-laws: failure in adhering to by-laws may result in claim against key executives. Wrongful termination, discrimination etc are an example to this.
- Claims arising out of misrepresentation and misleading statements by the board members
- Claims from competitor on the grounds of theft of intellectual property and misappropriation of trade secrets.
Will I get a claim under D&O if it is also covered under another policy
No. Claims that can be covered under another liability policies such as bodily injury, property damage etc are excluded from D&O policy. Though Directors and officer’s liability insurance provides comprehensive risk cover, insured is required to notify all insurers from their multiple policies, so that insurance company can determine who is liable for the claim.