Insurance Advisory Newsletter: THE WHO, WHAT AND WHY OF DIRECTORS AND OFFICERS LIABILITY INSURANCE-July 2021
The Directors and Officer’s liability insurance policy (“D&O policy”) is an insurance policy intended to protect individuals like a director, an officer or any persoan working in a managerial capacity of an organisation as well as an organisation itself for whom such directors and offciers work for, against claims relating to the actions or decisions of directors and officers taken in their official capacity. The D&O policy shields the personal assets of such directors and officers as well as the corporate assets of the entity (as applicable), if they are sued personally by employees, vendors, competitors, investors, customers, or other parties for an actual or alleged wrongful act (while managing or running the day to day operations of an organisation) including but not limited to employment and shareholder claims, corporate governance requirements and other risks as detailed in below sections.
The D&O policy applies to the acts of natural persons who are former, present and future members of the board of directors, officers, the management and any employee performing a managerial or supervisory role or any claims on an organisaiton or such individuals. This definition could extend to persons beyond directors and officers of an organisaiton like a trustee of superannuation, pension or provident fund, an external committee member, an outside director etc.
WHEN DOES A D&O POLICY SET IN MOTION?
Some of the specific exposures and risks which may activate the D&O policy are as follows:
• Breach of fiduciary duties resulting into financial losses
• Shareholder/stakeholder claims
• Sexual harassment, discrimination and other employment practice claims by the employees
• Regulatory investigations
• Accounting irregularities
• Exposures relating to mergers and acquisitions
• Competitor claims
• Claims relating to Corporate manslaughter
WHAT ARE THE DIFFERENT COVERAGES A D&O POLICY OFFERS ?
The D&O policy is characterised by its three different types of coverages offered by the insurance company (“Insurer”) for claims against the insured i.e. directors, officers and the company (“Insured/Company”) namely:
• Side A coverage- Directors and Officers insuring clause: This coverage covers directors and officers for claims where the Company refuses to or is financially unable to pay for indemnification of the loss. This can occur, for example, if the company has declared bankruptcy. Under Side A coverage, the individual officer is the one who is insured and it’s their personal assets that are at risk are protected.
• Side B coverage- Company Reimbursement: This coverage covers the losses of directors and officers when the company indemnifies such losses. In this case, the policy will reimburse the company for legal costs. Under Side B coverage, it is the company that is insured while its corporate assets are at risk.
• Side C coverage- Entity Securities : This coverage covers companies listed on the stock exchange. When these companies incur liabilities for the traded securities, the D&O policy covers them. The D&O policy covers the Company against the liabilities that it suffers due to any securities related grievances.
WHAT EXPENSES A D&O POLICY COVERS AND TYPES OF COVERAGES ?
D&O policy covers defence costs, investigation costs, administrative costs, negotiation, and settlement costs of all the covered claims. The coverage structure of the policy involves multiple layers. Key coverages under the D&O policy are as follows:
• Employment Practices Cover: The D&O policy covers the claims from the employees against the Insured relating to the employment practices ie. actual or alleged wrongful dismissal, termination or discharge of employment retaliation (including lockouts), employment-related humiliation, harassment (including sexual harassment), defamation, invasion of privacy, wrongful deprivation of career opportunity etc.
• Public Relations Cover or Professional Consultancy Expenses: D&O policy will reimburse reasonable fees and costs incurred for any public relations consultant, who is engaged to prevent or minimise the risk of a claim which would be covered under the D&O policy.
• Outside Directorship Cover: The D&O policy covers the risk of regulatory actions or scrutiny faced by an out side director.
• Tax liability cover: This cover provides for any tax liability on the director after the liquidation of the Company.
• Psychological Support Cover: Insurer in a D&O policy will protect an Insured and pay for psychological support expenses of hiring some psychologist/ counsel by the Insured.
• Emergency Costs and Expenses: The D&O policy also covers the costs and expenses incurred by the Insured in an emergency if Insurer’s written consent cannot reasonably be obtained before costs and expenses are incurred with respect to any claim.
WHAT DOES A D&O POLICY EXCLUDE?
Typically, a D&O Policy does not respond to the following instances:
• Bodily injury
• Property damage
• Breach of contract
• Dishonest acts
• Intentional acts of noncompliance
• Claims covered by other insurance
• Claims made under a previous policy
IS D&O POLICY RELEVANT TO A PRIVATE LIMITED COMPANY?
A D&O policy is important not only for a public or a listed company but also for any private limited company as well as a not for profit company since the coverages offered under the D&O policy are relevant to a private limited/not for profit company also. D&O offers following protections to the legal entities,
• To the personal assets of directors and officers and those of their spouses and estates.
• To protect the income statement and balance sheet of the Company.
• To attract and retain qualified outside directors.
• To establish a relationship with an insurer before a potential initial public offering (IPO).