Directors & Officers Liability Insurance

Managing a business enterprise has never been so challenging. The growing competitive landscape, the fear of failures & the stricter local and global regulations have kept the boards short of “throwing caution to the winds”. But, business being business, their managers do need the freedom to take decisions and engulf risks in the process.

Business directors and senior officials, in spite of complete prudence, can take decisions within their regular duties, which can bring losses to the organization or for which they can be held financially liable to various stakeholders like the shareholders, creditors, suppliers, banks, financial institutions, regulators, employees and the competitors etc.

There is a growing trend of such claims both in the West and in Asia. The USA has witnessed huge settlements in well known cases involving Enron, AOL Time Warner, and WorldCom etc. Employment related litigations, regulatory crackdowns and security related class suit actions are common in the West, but is also not unknown in the Asian market.

D & O (Director’s & Officer’s) Liability Insurance Policy

D & O (Director’s & Officer’s) Liability Insurance Policy offers cover to the managers and indemnifies them for insured financial liabilities incurred while performing their duties. Apart from protecting individual managers, the policy can also offer reimbursements to the company if the company so decides to pay off the financial liability. The policy can also extend to cover the corporate entity against claims relating to offer, sale and purchase of securities in the market. On a broader scale, the policy can also be extended to cover liabilities arising out of employment practices which can include cases of discrimination and unfair employment practices.

D&O policy covers current, past and future directors and officers. It also covers outside directorship, part time directors and non executive directors.

Some of the legal scenarios that can lead to a claim are Errors in Reporting, Omission & errors in Public Offering Prospectus, Incorrect decisions leading to financial loss, Non compliance with regulations, unfair treatment of employees etc. Obviously, the policy has certain exclusions. Some of the excluded scenarios include intentional non compliance, criminal acts and fraud.

In a nutshell, D&O insurance is supposed to perform the following functions:

Covers financial liabilities of directors and officers

  1. Personal assets of individual directors can be protected.
  2. Legal and other fees are reimbursed.

Protects the Organization

  1. Protects the organization against securities claims or employment claims.
  2. Can reimburse the settlement amount to the organization that chooses to defend its directors.

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