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Director & Officer policy: A cover for managerial liability

While the policy provides comprehensive cover, it does not protects those directors and officers who are proven to be dishonest or are engaged in fraudulent activities


February 23, 2015 2:41:00 am

By: Sanjay Datta

The role of a Board of Director or an Officer (D&O) holding an executive position goes beyond developing the strategy and managing the performance of the company. These individuals also act as the face and create goodwill for the organisation. While serving on the board, directors and officers carry with them a host of legal obligations under various statutes.

They also have a fiduciary responsibility to exercise skill, care and diligence as part of their key positions. There are several instances when the decisions by these executives are inferred incorrectly or their statements lead to allegations. These allegations could be frivolous; the claimant may have a vested interest in maligning the individual/entity etc. They could face endless legal battles, enormous legal bills and distractions from peaceful functioning.

The important point here is that the director or officer can be personally held liable. In the face of these allegations it is important to refute or defend these allegations legally to protect the director or officer from personal risk or reputational liability. Fighting legal battles can make the entire ordeal an extensively time consuming and expensive exercise.

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Companies in their Articles of Association incorporate an indemnification clause to cover their directors and officers arising out of their corporate activities.

However, corporate indemnification may not be adequate protection against the liabilities. Also, the company may not have sufficient cash flow to pay for liabilities and expenses incurred in a D&O claim. Director & Officer Liability Insurance (D&O policy) is a cover that can shield senior executives from litigation-related monetary setbacks.

It protects the directors and officers of a company from any personal liability arising out of decisions and actions taken in their fiduciary or managerial capacity. An organisation which has availed of D&O policy is reimbursed by the insurer to the extent that it has indemnified its director or officer with respect to such claims.

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The policy compensates for damages and defence cost of the professionals even in criminal cases, subject to the directors and officers being acquitted of the charges. It takes care of the investigation cost and expenses incurred to consider the services of a crisis mitigation consultancy in order to minimise or reduce the risk of a claim. D&O policy also covers the cost borne by the insured to obtain the discharge or revocation of a judicial order. The cover defends the director even in case of untimely death and prevents spill over liabilities from affecting their heirs, estates and legal representatives.

Besides the professionals directly employed by the organisation, the policy also covers directors and officers of subsidiary companies as well as outside or non-executive or independent directors. The policy has a provision to cover past, present and future directors on an unnamed basis. Though meant for directors and officers, the policy can be extended to cover the entity itself for security and employment practices liability covers.

While a D&O policy provides comprehensive cover, it must be noted that the policy by no means protects those directors and officers who are proven to be dishonest or engaged in fraudulent activities or any criminal act. Also prior or pending litigations of a director or officer demand or circumstances notified under a prior policy are not covered. Even fines, penalties, punitive damages imposed on the directors and officers are not covered under the D&O policy. This cover also does not include bodily injury or property damage claims made on the insured professional.

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From its inception at Lloyds in 1934 when it was first issued to Macy’s, Inc, the D&O policy has undergone a gradual evolution to evolve into a comprehensive cover today with a global market size estimated at approximately $10 billion.

The landscape in India with respect to D&O insurance has witnessed rapid changes during the last ten years. The high profile cases in public domain have made company directors realise that they are exposed to significant personal liability for personal misconduct, actual or even alleged. The Indian market issues about 5,000 D&O policies today. D&O cover has now become an integral part of listed companies’ risk management practices and private companies too are availing this cover, albeit in smaller numbers. The cover is also widely used as a means to continue attracting and retaining competent D&O on board companies.

The new Companies Act defines managerial personnel as not only the board members of a Company but also people who handle key managerial roles in an organisation. The Act has increased audit requirements and regulatory compulsions faced by managers on a day to day basis with the introduction of new regulatory bodies such as National Law Tribunal etc. This coupled with Sexual Harassment of Women at Workplace and developments in whistle blower act, there is growing realisation towards adopting D&O cover as a concept. As more and more Indian companies become multinationals, foreign entities invest in Indian companies and Indian companies employ people of various nationalities, the Indian D&O policy market is set for interesting times ahead.

(The author is Chief — Underwriting and Claims, ICICI Lombard)

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First published on: 23-02-2015 at 02:41:00 am

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