What is Directors and Officers (D&O) Insurance?

A director's and officer's (D&O) liability policy covers a person against personal losses in case they are sued because of serving as a director or officer of a business. Additionally, such a suit may result in legal fees and other costs being incurred by the organization.

Key Takeaways

1. Generally, directors and officers liability insurance exclude fraud and criminal offenses from coverage (most policies exclude directors and officers).

2. Insurance claims for D&O cover losses associated with lawsuits, including legal defense costs.

3. Directors and officers are covered by side A coverage when the company refuses or cannot indemnify them.

4. Directors and officers are covered by Side B coverage when indemnification is granted by the company.

5. An entity coverage, also referred to as side C coverage, extends coverage for the company itself.

D&O insurance meaning

D&O insurance covers C suite executives of an organization. Additionally, D&O insurance can reimburse a business or nonprofit for legal fees or other costs incurred in defending individuals against lawsuits. It protects against personal losses.

If a company or organization faces a legal action, directors and officers can be compensated for losses or reimbursed for defense costs. Additionally, such coverage may cover criminal and regulatory investigations, as well as trial defense costs. Directors and officers are often sued both civilly and criminally.

Three sides of D&O policy

If the company refuses to pay for indemnification or is financially unable to do so, Side A coverage covers directors and officers. Under Side A coverage, the individual officer is the one who is insured, and it is their personal assets that are at risk. If the company declares bankruptcy, for example, this can occur.

If the company does grant indemnification to its directors and officers, Side B coverage will reimburse the company's legal costs. Under Side B coverage, the company is insured while its corporate assets are at risk.

The side C coverage, or entity coverage, offers insurance coverage for the company itself. Under Side C coverage, the company's assets are insured.

It ultimately depends on a company's business model, needs, history, and financial situation which coverage it chooses.

Directors and officers liability insurance process

D&O insurance is easy to understand in real life. It all begins when a manager is alleged to have failed to perform their duties. Insolvency, employment malpractice, reporting errors, inaccurate disclosures, insolvencies, and regulation violations are some of the most common risk scenarios that lead to lawsuits by several claimants.

Upon being informed of the claim, the manager, legal department, and risk management department provide a description of the claim to their broker/insurer. If the claim is covered, the insurer covers the defense costs. In case the claim is covered, and it is lost, the insurer pays for defense costs as well as financial losses. There is a great deal of variation depending on the specific policy's terms and conditions.

There has been a growing association between D&O insurance and broader management liability insurance, which covers the corporations' liabilities as well as the directors and officers' own personal liabilities.

There are Some Special Considerations

An organization's D&O policy can vary depending on the risks it faces and the type of organization it is. It is best to find an insurance company with a lot of experience in the field. A group of individuals is usually covered by the organization rather than by the individuals.

A company may be liable for non-disclosure of material information or willfully providing inaccurate information to the insurer, thereby avoiding payment.

Severability clauses may be intended to prevent this by preventing misconduct by one insured from affecting insurance for others; however, they may not be effective in all jurisdictions.

Fraud, criminal activity, and illegal profits are generally excluded from insurance policies, which can be written to cover a variety of hazards. Moreover, most policies include "insured vs. insured" clauses, which prevent a company from profiting from deceit or conspiracy when current or former directors and officers sue them.

D&O insurance: Is it necessary?

D&O insurance should be seriously considered depending on your business' size and nature. In a Chubb study, 25% of private companies reported a D&O loss over the course of three years, and 96% of those companies were negatively affected. It's fair to say that any company with a board of directors would benefit from D&O insurance, even though it isn't necessary for every single business in every situation.

Faqs

1. What is the need for D&O coverage for small businesses?

Small businesses are not exempt from expensive lawsuits. It may be tempting to believe that legal actions and penalties only arise from unhappy shareholders, as is often the case with prominent lawsuits against big public corporations. However, for private companies, the most detrimental lawsuits come from customers, vendors, and other third parties. Due to their limited financial resources, small companies may find themselves especially susceptible to potentially harmful legal disputes.

2. Do D&O insurance policies cost a lot?

No. Its quite affordable. You can get Rs 1 crore cover at Just Rs 10,000 only at BimaKavach

3. How do I choose the right D&O insurance policy?

Well, here you need an expert help. BimaKavach ties up with most reputed insurers in the market. Several points need to be considered: does the policy cover just managers or does it cover the entire company? How much coverage is enough? What is the biggest D&O risks your company faces?

4. What Does D&O Insurance Cover?

If a company is held liable for legal fees, settlements, and financial losses, D&O insurance typically covers those expenses. Among the allegations covered are breaches of fiduciary duties, failure to comply with regulations, poor corporate governance, creditor claims, and reporting errors. In most cases, outright fraud, criminal activity, and lawsuits between company managers are not covered.