Looking for a D&O insurance for a new policy? Then you have landed on the right space. Let us start with the basics first.
A Director and Officers (D&O) Insurance policy protects directors, board members, and other individuals in management and supervisory capacity from possible legal liability if they are indicted for decisions made to run a business. It protects their personal assets from confiscation and losses in the event of a lawsuit. It reimburses businesses for legal fees and other costs incurred to defend such C Suite executives from lawsuits.
What are the three sides of D&O Coverage?
Side A Coverage - A D&O policy provides liability coverage for company managers, officials, and directors to protect them from claims arising from their managerial decisions and actions.
Side B Coverage – Side B Coverage policy ensures that the company is reimbursed for its expenses incurred during the process when a company indemnifies (provides financial protection) its directors or officers for a covered claim under the policy.
Side C Coverage - No matter whether the directors or officers are directly involved in the underlying dispute, this coverage provides protection for the company against certain legal claims. In general, this coverage covers two main areas: Employment Disputes & Security-Related Issues.
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Who needs Directors & Officers Insurance (DNO)?
A D&O policy should be in place for any company with corporate boards or advisory committees to protect its executives. Regulators, shareholders, vendors, customers, competitors, employees, and government bodies can sue company owners today. For every company, this policy is a "must-have" since it protects them from expensive lawsuits.
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What is Included in Directors and Officers Insurance?
Generally, a D&O insurance policy provides the following covers to businesses-
1. The dedicated additional limit for Non-Executive Directors and Officers
You get an extra layer of protection that is added to the overall coverage limit for non-executive directors and officers of a company. In the event of a lawsuit or claim against a non-executive director or officer, all loss or damage up to this additional limit will be covered. But this is only available where there is no other source of indemnification available to the Non-Executive Director or officer, after exhaustion of the Limit of Liability or other available insurance.
2. Emergency Cost
If the insurer’s written consent cannot reasonably be received before defense costs are incurred, the Insurer would agree to provide retrospective approval to cover such costs. This is for till the time the insured can seek such written consent. This time limit is usually for a period of 30 days from the date of the claim and may vary from one insurer to another. Within this time, the insured shall give written intimation to the Insurer of the claim that was the subject of the emergency, along with reasons why the emergency existed.
3. Legal representation cover and Interpretative Counsel Costs
It includes defense costs incurred by an insured along with the cost of hiring a lawyer to represent the company in court. When an interpretative counsel is hired within the home jurisdiction to understand the legal implications of the case – their expenses are also covered.
4. Bail and Bond Costs
D&O policy covers the costs of securing bail and bond for directors and officers, which may be in connection with any criminal proceedings arising from their duties.
5. Public Relations cover
It reimburses the costs associated with managing and mitigating the negative impact on the company's reputation, arising out of duties performed by the directors and officers on behalf of the company.
For example, the insurer will cover the costs associated with hiring a public relations firm to reduce or prevent the effects of negative publicity which the insured believes may result in a claim or an inquiry.
6. Discovery Period for Retired Directors & Officers-a minimum of 7 years
If a retired director is sued for a wrongful act that occurred during his tenure as a director, he can still make a claim under the D&O insurance policy for up to 7 years after the policy has expired. However, such claims should be for wrongful acts and inquiries that may have occurred prior to the effective date of policy termination or non-renewal. No additional premium is required for such an extended Reporting Period with respect to retired Directors & Officers, provided this policy is not renewed or replaced with any other policy that gives them similar management liability cover.
7. Discovery Period
If the policy is terminated or not renewed (for reasons other than termination by the insurer for non-payment of premium) and no event has occurred, the insured is granted an extended period to discover and report any claim. However, such claims should be for wrongful acts occurring prior to, and investigations into conduct prior to, the effective date of termination or non-renewal.
8. Automatic Cover for New Subsidiary
It automatically provides protection to new subsidiaries of a company that are acquired or created during the policy period. The insured should give the insurer sufficient details so that the insurer can assess and evaluate the insurer’s potential increase in exposure after such creation or acquisition.
9. Extradition Cover
This coverage protects a company if a director or officer is arrested or detained in a foreign country and the company needs to pay for the costs associated with his extradition back to the home country.
For example, if a director or officer of a company is travelling abroad and gets arrested or detained in a foreign country, this coverage would provide protection for the costs associated with his extradition proceedings (such as legal fees, travel expenses, and other related costs).
10. Corporate Manslaughter Cover
If death happens in the workplace, a company can be sued by the family of the victim, alleging that the company’s actions resulted in the death and the management failed to take reasonable care to prevent the death. In the event of such a claim, this coverage would provide protection for the costs associated with the legal defense, civil fines, penalties, reputation protection, crisis management, and other related costs.
11. Tax Liability Extension
Tax Liability means a liability that an Insured incurs personally for the unpaid taxes of an organization due to the financial impairment of the organization. It provides protection in case a director or officer has been held personally liable for taxes that the company was unable to pay due to liquidation or insolvency. This coverage applies only when the D&O can prove that they did not intentionally withhold such tax payments and circumstances were beyond their control. They also need to prove that the liability did not arise due to a criminal or wilful breach of any law or regulation.
12. Advancement of Defense Costs
In the event of a claim or inquiry, the insurer will pay the defense costs or legal representation expenses incurred by the insured before the final judgment or disposition of the case
13. Civil Fines and Penalties
By having this coverage, directors and officers can be protected from financial losses resulting from civil fines or penalties imposed on them. Besides paying the fines or penalties, it also covers the costs of defending against the charges that led to those fines or penalties. However, these fines and penalties are covered to the extent that such penalties are insurable under the law of the land where they are imposed and the country where the Insurer is located and up to the sub-limit mentioned in the policy.
14. Outside Directorship Cover (Exclusion of financial institution)
There is automatic protection to any company director, who is serving as a director in any outside company during the policy period. However, such coverage will apply to him for 90 days from the date of commencement of such outside directorship and will terminate post this period unless written intimation about the outside directorship is provided to the insurer within this period.
15. Order of payment clause
If payment of loss under this policy is due but the aggregate amount exceeds or may exceed the remaining limit of liability, the insurer will-
- First pay for the legal representative costs covered under the policy for individual directors and officers.
- Then, if any limits remain, payments will be made for such loss for which coverage is provided under another insuring clause in the policy.
16. No cancellation Clause
The policy protects company directors and officers from the risk of their insurance policy being canceled by the insurer before the policy's termination date.
For example, if a company is facing financial difficulties or is involved in a lawsuit, the insurer may choose to cancel the D&O policy to avoid paying out any claims. The no-cancellation clause coverage ensures that the insurer cannot cancel the policy unless certain conditions are met, such as non-payment of premium or deliberate fraud.
17. Professional Liability exclusion (Amended with carve back for failure to supervise)
D&O does not cover losses for any claims arising out of professional services provided by the insured to a third party. But it has a carve-back provision that if the claim arises from a failure to supervise, it will be covered.
This exclusion will not apply to claims by a Securities holder or group of Securities holders of the company, without the solicitation, voluntary assistance, or participation of the Insured.
18. Major Shareholder Exclusion Threshold
This exclusion may appear in some D&O policies and excludes coverage for claims made by large shareholders (usually more than 5 percent to 10 percent). It prevents a major shareholder or group of shareholders from purchasing D&O insurance coverage for themselves and using it to shield themselves from liability arising from their own actions. Also, such claims are often the result of infighting or personality conflicts between the major shareholders or shareholders and management, rather than caused by managerial errors involving substantive business decisions.
19. Court Attendance Costs
This coverage provides protection from reasonable costs and expenses incurred by the insured due to required attendance at court proceedings, hearings, trials, and depositions -related to the defense of a claim.
For example, if a director is required to attend court in connection with a lawsuit related to his actions as a director, this coverage can help to reimburse the director for expenses related to the said court attendance.
20. Court-Deprived Assets Additional Costs
This coverage helps to protect company directors and officers from additional legal and personal expenses associated with court-ordered assets being deprived of them because of claims made against them in their capacity as directors or officers. If an interim or interlocutory order comes across during the policy period, imposing confiscation, control, suspension, freezing, or a charge over real property or personal assets of the Insured - the insurer will cover personal expenses when such individuals are deprived of access to their personal assets. Common expenses include schooling, housing, utilities, and personal insurance.
21. Kidnap and Ransom Costs
This coverage provides relief from the costs associated with any event or connected series of events of kidnapping, seizing, or detaining an insured person by force or fraud, for the purpose of demanding ransom. It covers expenses such as ransom payments, reasonable fees of the kidnap consultants incurred in response to such an event, travel, accommodation, communication and payments to informants, and other such expenses related to the safe return of the individual.
22. Self-Reporting Expenses Cover
Get protection from the financial burden of expenses associated with self-reporting a potential violation or claim to the relevant Governmental, judiciary, or regulatory authorities. Such self-reporting should be pursuant to an obligation to inform such agency of matters leading to actual or potential regulatory issues, where failure to provide such information or delay in notifying, can itself result in larger consequential losses. This cover can help to reimburse the insured for expenses such as legal fees, investigation costs, and other costs associated with the self-report.
23. Investigation Costs
D&O policy covers the investigation cost. It covers the reasonable fees, costs, and expenses incurred (with the insurer’s prior written consent) by or on behalf of an insured person, in relation to preparing for and attending an investigation. Such an investigation should be in connection to a potential violation or claim against the insured in his or her capacity as a director and officer.
24. Crisis Communication Cover
It covers the reasonable costs, charges, fees, and expenses incurred by an organization, in attaining the services of any public relations firm or crisis management firm to advise the organization while managing public communication and restricting the disruption to the business in the event of a crisis.
For example, if a company’s brand value and reputation are damaged or could be damaged by an adverse media report, this coverage can help to reimburse the company for expenses such as hiring a public relations firm to manage the crisis and communicate with the public, as well as any other costs related to managing the crisis.
25. Employed Lawyer Extension
At times, hiring additional lawyers with specialized expertise becomes necessary to handle complex legal issues, such as intellectual property, employment law, or international trade. Also, If a company has operations in multiple states or countries, it may need additional lawyers to ensure compliance with local laws and regulations. In such cases, the cost of hiring additional lawyers is taken care of.
26. Occupational Health and Safety Defence Costs
It covers the defense costs, civil fines, and penalties resulting from a claim or legal representation costs originating from an Inquiry, in relation to any alleged breach of any Occupational Health and Safety (OHS) law or regulation, including but not limited to a Workplace Death.
27. Mitigation Costs Cover
It protects company directors and officers from the costs associated with mitigating a loss that may arise from a potential violation or claim against them in their capacity as a director or officers. It reimburses the insured for expenses such as hiring the services of a regulatory response team and/or a loss avoidance and mitigation team during the policy period.
What is Not Included in Directors and Officers Liability Insurance?
1. Sanction Clause
The insurer is not liable to pay any claim or coverage under this policy if the provision of cover or payment of any claim would expose us to any sanction, restriction, or prohibition imposed by the United Nations resolutions, or the trade or economic sanctions, laws, or regulations of the European Union, United Kingdom, or the United States of America.
2. Product Liability
Product liability refers to the legal responsibility of manufacturers, distributors, and sellers for any harm or damage caused by a product they have produced or sold. It specifies that if a claim is made against the insured, alleging that a third party suffers property damage or bodily injury from the insured’s products, this policy will not cover such claims.
4. Money Laundering
Money laundering is a process where people hide the illegal source of their income and try to show the income as legal. If a claim is made against the insured for something related to money laundering, it will not be covered under this policy. This exclusion will only apply where the allegation has been established by written admission by the insured, court judgment, or other final adjudication.
5. Bribes and Commission
Directors & Officers policy excludes claims and losses arising from alleged acceptance of bribes and commissions by the insured. This exclusion will only apply where the allegation has been established by written admission by the insured, court judgment, or other final adjudication.
6. Financial Insolvency
Financial insolvency refers to the inability of a company or individual to pay their debts as they come due. It specifies that the policy will exclude cover for claims and/or loss arising from or sufficiently relating to the insolvency of an insured organization.
7. Asbestos
Asbestos is a naturally occurring mineral that has been used in various products, including construction materials and has been linked to various diseases such as lung cancer, mesothelioma, and asbestosis. If a claim is made against the insured arising out of allegations that he failed to disclose the danger or other claims related to asbestos, it will not be covered under this policy.
8. Opioids and Narcotics
If a claim is made against the insured for something related to opioids or narcotics, the same will not be covered under this policy. Claims or allegations in this category include (but are not limited to) falsely marketing opioids as non-addictive by the insured, failure of medical monitoring by the insured, and so on.
9. E Smoking Device
This policy excludes any claims or losses that are related to the manufacture, trade, storage, transportation, and advertisement of electronic smoking devices or e-cigarettes by or on behalf of the insured.
10. War
If a claim is made against the insured for events that happened because of war or warlike situations, the same will not be covered under this policy. Such events may include- invasion, acts of foreign adversaries, armed conflict or warlike operations (regardless of whether declared or not), rebellion, revolution, civil war, insurrection, civil commotion amounting to an uprising, military or usurped power, confiscation/nationalization/requisition/ destruction of/ damage to property by the Government, public or local authority and so on.
11. Future Offering of Securities (IPO)
If a claim is made against the insured that is related to a future offering of securities (IPO), the same will not be covered under this policy. Such events may include (but are not limited to)- providing misleading information in the prospectus, failure to disclose material information to potential investors, providing an untrue statement in the prospectus, and so on.
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