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Directors & Officers insurance — significance, complexities & why the policy is needed

Directors & Officers policy acts as a lifeline for directors and senior officers providing coverage for loss arising from claims made during policy period.

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Uneasy lies the head that wears the crown.

Times have changed, but not the truth behind those immortal words. The directors and officers of the modern-day business units are indeed the kings and queens of their respective domains.

Yet, most of them always remain anxious about the consequences of their actions and the plethora of troubles they may face. Any decision made by a director or an officer in the course of fulfilling his or her fiduciary responsibilities can be questioned by those aggrieved by it.

Today, we live in a world where corporate governance has become omnipresent.

The economic and social environment around us reveals:

– Ever rising regulatory oversight
– Growing stakeholder pressure
– Increasing customer awareness
– Heightened judicial activism
– Impact of globalisation
– Huge increase in judicial costs
– Environment and climate change activism

Given such a challenging environment in which companies operate, the actions of directors and officers can be questioned by:

– Government or regulatory bodies
– Shareholders
– Employees
– Competitors
– Creditors
– Official liquidators or receivers
– The company itself
– Anyone arising from breach of contract

It would not be a cause for worry if the cost of defending the actions of senior officials and meeting the awards of compensation were taken over entirely by the company.

Unfortunately, that is not always the case. The company may not be in a position to meet the costs due to bankruptcy or the company may not choose to defend the actions of directors and senior officials.

The reality is that while the company has limited liability, the liability of a director is unlimited for acts that may be wrong, negligent, beyond authority or show an improper management of the company.

The D&O (Directors and Officers) policy, therefore, acts as a lifeline for directors and senior officers. It provides coverage for loss arising from claims made during policy period that allege a wrongful act against an insured, acting in an insured capacity that is not excluded under the policy.

The policy reimburses defence costs and any compensation awarded against the directors for any litigation that they may face due to an error, omission, mistake, misstatement or breach of authority.


What D&O policy entails

Side A cover provides personal protection and reimburses D&O when the company cannot or does not reimburse these costs.

Side B cover indemnifies the company for costs incurred in litigation against D&O.

Side C is meant for companies listed on stock exchanges that incur liabilities due to a Securities related matter.

However, like any other insurance policy, D&O policy is also governed by terms, conditions and exclusions that may enable an insurer to decline a claim. Some of the most often seen issues in claims management are:

– Non-disclosure of material information. All proposal forms have a standard question — ‘Are you aware of any incident that may give rise to a claim?’ Very often the response is no or N.A., which may not be the case.
– Delay in notifying an incident to the insurer.
– Engaging legal counsel and incurring legal expenses without concurrence of the insurer.
– Agreeing to pay compensation without written approval of the insurer.

The fact is that this is a complicated policy and requires an experienced specialist to provide the optimum benefits to the policyholder. Only then can this policy be the lifeline that rescues directors and officers from the sea of troubles that they may face.

Their crowns will continue to lie uneasily on their heads and the challenges they face will not abate, but the adverse financial consequences of their actions can be greatly reduced through this insurance cover.

Vivek Saksena is the senior vice president- claims at Global Insurance Brokers



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