Why Your Business Needs The Directors & Officers Liability Insurance

In 2016, an ousted director of a corporate company brought about a retaliatory lawsuit against the other board members. However, the company had a D&O (Directors and Officers) cover to protect its board members. The 2018 #metoo movement in India triggered many companies to purchase and protect their directors against legal actions. Although not compulsory, having the Directors & Officers Liability Insurance ensures that companies are not adversely affected. 

If you aren’t aware of the D&O Insurance and wondering if you should get one for your business, this article will tell you a lot about D&O Insurance basics and help answer a lot of your questions.

What is D&O Liability Insurance Policy?

It’s a policy specifically designed to protect directors, officers, managers and the decision-making employees of a company in the event of a claim against them. This insurance policy pays for legal defence costs, financial losses resulting from lawsuits. The D&O Insurance is not mandatory as per the Companies Act 2013. However, a lot of companies opt for this policy to safeguard their management.

Employees, customers, investors, vendors, competitors, or regulatory bodies could take legal actions against directors and decision-making officers for various reasons. Some of the common reasons for lawsuits against directors and officers are:

• Knowingly allowing employee harassment
• Failure to comply with regulations
• Deliberately misleading with wrong information or misstatements
• Discriminatory practices 
• Errors in managerial conduct or breach of duty
• Negligence, default
• Breach of trust

Lawsuits, claims and settlement amounts can be extremely high and could add up to huge losses for the business. The D&O insurance can shoulder such losses. 

Why and how are directors liable?

In order to understand this insurance, it is important to first understand the personal liability of the directors and officers connected to the company. A company can have limited liability, but that’s not the case with its directors. Directors and officers have several liabilities. It is a directors liability to pay for losses incurred by the company in case of negligence, misconduct, and breach. 

They are bound by duty towards all stakeholders – employees, customers, competitors, government, regulatory bodies, investors and shareholders. Any violation or misconduct can end up in a lawsuit against them. At times, even with care and caution, things can go wrong. What happens then? A D&O Liability Insurance policy can provide relief to them. 

What are the risks covered by the D&O policy?

• Regulatory investigation related issues
• Accounting discrepancies 
• Mergers and acquisition related risks
• Liability to claims by shareholder/stakeholder 
• Employment practice damages, such as harassment and discrimination, failed promotion 
• Securities claims related to shareholders 
• Corporate Governance requirement and compliance

Why should a business have a D&O policy?

Having a D&O Insurance policy is not compulsory for all businesses. But it is beneficial to a lot of businesses across industries. A number of companies do not purchase a D&O Insurance policy because they have never faced any such issues in the past. Thus, they are unaware of such a policy and its benefits and they are under the impression that because they are a small, family-run, unlisted company, their directors and officers are not exposed to such risks. They could be extremely misguided. 

Another key point to note is that according to the Companies Act 2013, it is not possible for companies to indemnify the losses suffered by the directors if they do not have a D&O policy. This makes it critical for companies to have D&O insurance.

It is important to consider all the risks and determine if a company should purchase this policy. Some of the reasons companies should consider purchasing this insurance are listed below:

• Increases company credibility: This insurance policy is not a replacement for or guarantee of sound management, but it helps reduce apprehensions of director and officer-level employees that a company might want to bring on board. 
• Instills confidence in decision-making: This insurance can help directors and owners take important decisions for the business while not having to worry too much about the personal legal ramifications. 
• Ensures smooth functioning of business: Companies that face charges against directors and managers go through a lot of problems in the daily business activities, such as, loss of productivity, negative impact to company culture, low morale of teams and employees and company reputation affecting business. 
• Improves recruitment opportunities for director-level roles and higher retention: Some industries could be more vulnerable to legal risks towards its directors. It is essential for companies to recruit and retain strong leaders, directors and decision makers. 
• Helps in business expansion and growth in foreign markets: With the increasing need for businesses to grow globally, Indian companies are assessing international markets. This includes new risks, challenges, new rules and regulations, which if not followed to the tee, might leave directors vulnerable. Certain sectors such as IT, knowledge-based sectors, consultancy firms, and outsource-related industries, should definitely have a D&O Insurance.

What are the types of losses that D&O insurance covers?

• Legal expenses and fees, defence costs, bail bond, and civil bond expenses.
• Damages and Settlement costs 
• Public relations expenses that may be incurred in order to reduce or prevent negative publicity.
• Costs for having a legal advisor 

What are the claims that the policy might not cover?

• Deliberate and intentional wrongdoing
• Criminal fines and penalties
• Dishonest and fraudulent conduct
• Claims relating to personal profits
• Breach of contract
• Defamation and slander claims

Why do SMEs need D&O Insurance?

The environment in which SMEs operate is dynamic and fast moving. Most SMEs require the management to be closely involved with the day-to-day activities and participate in decision-making processes. Moreover, the pace of activities and decision-making could leave businesses exposed to the dangers of making wrong decisions, not following regulations and more.

Managers of small businesses are accountable to the company’s stakeholders-customers, vendors, and investors, among others and hence, are at a risk of facing legal actions. They are not insured by other policies that businesses might have, such as Fire Insurance or General Liability Insurance. Apart from that, there could be issues such as sexual harassment, issues related to Human Resource and more, that can be covered by insurance.

Since company managers and directors are closely involved with the business in SMEs, they are highly susceptible to lawsuits from different stakeholders. In fact, a company’s managers are not insured by policies such as fire or general liability policy.

In such a scenario, an expensive lawsuit could have severe effects on the director’s personal net worth. To protect employees in such a situation, it is important for small and mid-sized enterprises to purchase a D&O policy.

As businesses grow, an increasing number of investors are holding directors and managers accountable in order to improve practices. PlanCover, a D&O insurance provider can help protect your business. 

PlanCover would address your queries and concerns with unbiased solutions that benefit you. Moreover, PlanCover’s approach of transparency at every stage of the policy’s life cycle ensures that you know what’s happening with your policy. For more details visit our website.