Directors & Officers Liability Insurance – For Listed and Unlisted Companies
Introduction:
Today’s corporate environment moves on a fast and dynamic ladder. Management be it Directors, Officers in managerial capacity takes decisions which can have a dangerous downside as well. These decision makers of the company are extremely susceptible to lawsuits from Regulators, Shareholders, Customers, Employees and Government Bodies amongst others. Besides, an expensive lawsuit can predominantly have severe impact in individual capacity since the owner's personal net worth is often tied to the financial health of the company.
Employee actions against directors and managers are another common source of claims in areas such as racial discrimination, sexual harassment and unfair dismissal. Further actions can arise as a result of Regulators’ actions under various statutes, such as the Companies Act 1956, Securities and Exchange Board of India Act 1992, Foreign Exchange Management Act 1999, etc.
Reports on Corporate Governance like the Kumaramangalam Birla Report 1999, the Narayana Murthy Report 2003 and Clause 49 of the listing agreement with stock exchanges, etc., set out the breadth and scope of board level responsibilities more clearly than ever before. These statutes set the standards for directorial behaviour and at the same time increase the potential for actions against directors who fall short of these standards. Defence costs and damages in such actions can vary from thousands to millions of rupees and the length of time taken to settle cases can extend from several months to several years.
What does D&O liability insurance cover?
The D&O policy provides cover for the personal liability of Directors and Officers arising due to wrongful acts in their managerial capacity. Defence costs are also covered.
Inter-alia it covers -
To whom does this cover apply?
The cover applies to former, present and future members of the board of directors, the management and any employee performing a managerial or supervisory role. Even independent and nominee directors are held to be equally accountable to stakeholders.
Besides, Indian Companies foraying into the global market to sell their products and services or to mobilize capital also needs to purchase D&O insurance to secure protection from overseas exposures.
Certain exposures which D&P Insurance covers:
If the directors and / or officers fail to act properly, they may be personally liable to:
Significant Exclusions
The regulatory atmosphere facing the directors & officers is more rigorous, their responsibilities more arduous thereby necessitating the importance of a cover to protect them from claims arising out in performance of their duties. The coming years will see even tighter legislation and increasing globalization of business, thereby subjecting directors and officers to closer scrutiny from shareholders, customers, employees, suppliers and regulators not just in the global market place but also in their domestic front.