In the fast-evolving Indian corporate landscape, mergers and acquisitions (M&A) are no longer rare milestones—they are strategic moves shaping the future of industries. But while companies focus on valuations, synergies, and growth potential, one crucial area often gets overlooked: liability risks for directors and officers. Enter: Directors & Officers (D&O) Insurance.
When a merger or acquisition is in motion, key decision-makers can become vulnerable to lawsuits, regulatory scrutiny, or shareholder backlash. D&O Insurance helps mitigate these risks, offering essential protection when leadership is navigating complex, high-stakes transitions.
In this blog, we explore how D&O Insurance works, why it’s crucial during M&A and what Indian businesses should keep in mind to ensure proper coverage.
What is D&O Insurance?
D&O Insurance protects the personal liability of company directors and officers in case they are sued for actual or alleged wrongful acts in their managerial capacity. These policies cover defence costs, settlements, and judgments, making them a vital safeguard in the event of claims arising from decisions made by company leadership.
A typical D&O Insurance Policy includes:
- Side A coverage: Protects directors/officers when the company cannot indemnify them.
- Side B coverage: Reimburses the company when it indemnifies its directors/officers.
- Side C coverage: Applies primarily to public companies and covers the corporate entity itself for securities claims, helping manage risks from shareholder litigation.
In India, D&O Insurance is gaining popularity, with increasing regulatory expectations and rising litigation, especially in sectors like BFSI, pharmaceuticals, and IT.
The Rise of M&A in India: A Risky Business
India has emerged as a global hotspot for M&A deals. According to PwC India, M&A activity in India reached close to $148 billion in 2022, driven by robust deal flows in technology, renewable energy, retail, and financial services.
However, alongside these big-ticket transactions come complex legal, financial, and operational risks. M&A often involves:
- Due diligence lapses
- Misrepresentation of assets/liabilities
- Employment disputes
- Regulatory breaches
These risks don’t just impact the corporate entity—they can result in personal lawsuits against directors and officers, especially from disgruntled shareholders, regulatory bodies (like SEBI), or even employees.
Why D&O Insurance is Crucial During M&A
Here’s why D&O Insurance becomes indispensable during mergers or acquisitions:
- Liability Protection for Decision-Makers
M&A deals can be scrutinised for conflict of interest, unfair valuations, or poor governance. If shareholders or regulators challenge the transaction, directors and officers may face personal lawsuits—even years later. - Coverage for Pre- and Post-Merger Claims
A well-structured D&O Policy can cover wrongful acts committed both before and after the transaction, providing a financial shield across the full deal lifecycle. - Mitigating Post-Merger Integration Risks
Post-M&A, integration challenges like layoffs, restructures, or inherited liabilities can trigger litigation. D&O coverage can extend to these new risks, provided the policy is properly updated.
Key Risks Faced by Directors & Officers in M&A Deals
Let’s break down some of the real-world risks that Indian directors and officers may face during M&A:
- Breach of Fiduciary Duty
Directors are expected to act in the best interest of shareholders. If a deal appears unfavourable or rushed, they may be accused of violating fiduciary duties. - Misrepresentation or Non-Disclosure
Failing to disclose key risks, pending litigation, or debt during due diligence can lead to lawsuits post-deal. - Regulatory Violations
Deals involving cross-border transactions, FDI, or listed companies must comply with SEBI, RBI, FEMA, and Companies Act provisions. Any non-compliance can attract personal penalties. - Employment Disputes
M&A often results in restructuring, layoffs, or changes in employment terms—leading to potential wrongful termination or discrimination claims.
How D&O Insurance Functions During M&A Transactions
Understanding how a D&O Policy responds during an M&A deal is critical:
➤ Pre-Acquisition:
Before the acquisition closes, directors need protection against any allegations of misconduct or misrepresentation during negotiations. D&O coverage ensures they’re not left financially exposed.
➤ Post-Acquisition:
Post-deal, there could be legacy claims from former shareholders, employees, or regulators. The D&O Policy of the pre-acquisition entity should ideally include run-off cover (explained below).
➤ Change-in-Control Clause:
Most D&O policies have a “change-in-control” clause, which means that once a merger closes, the policy typically ceases to cover new wrongful acts, but may continue to cover past acts if tail coverage is purchased.
Run-Off (Tail) Coverage: A Must-Have Post-M&A
Run-off coverage is a policy extension that continues to cover past directors/officers for wrongful acts committed before the merger. It is not automatically included and must be specifically negotiated and endorsed in the policy at the time of transaction closure.
For example: If Company A is acquired by Company B, and a lawsuit is filed 6 months later against Company A’s former CFO for alleged financial misreporting, run-off cover ensures that the CFO’s legal costs are still covered—even though they no longer work at the merged entity.
In India, it’s common to buy run-off cover for 3 to 6 years, depending on the nature of the business and expected claim period.
Tailoring the D&O Policy for M&A-Related Risks
Every M&A deal is unique. That’s why it’s crucial to customise the D&O Policy to address transaction-specific exposures. Here’s how:
- Adjust Limits of Liability
Post-acquisition, you may need higher limits due to increased exposure, more directors, or expanded operations. - Negotiate Broader Wording
While D&O Policy wordings in India are typically standardised, brokers can negotiate endorsements or manuscript clauses for large or complex transactions to cover deal-specific exposures. - Clarify Retroactive Dates
Ensure the policy has an adequate retroactive date that includes past wrongful acts. This is especially important if the buyer inherits legacy exposures or if run-off coverage is triggered. - Avoid Gaps in Coverage
Coordinate with both buyer’s and seller’s insurance brokers to ensure seamless coverage across entities and phases.
Regulatory Landscape in India: What You Need to Know
India has a growing body of corporate governance laws that make D&O Insurance more relevant than ever.
- Companies Act, 2013: Imposes fiduciary duties on directors; allows class action suits.
- SEBI (LODR) Regulations: Applies to listed companies; strict compliance needed during takeovers.
- SEBI (SAST) Regulations: Critical for M&A involving listed companies; mandates open offers and disclosures during substantial acquisitions.
- IBC (Insolvency and Bankruptcy Code): Directors of insolvent companies can be held liable for wrongful trading.
Stat Check: As per Marsh India’s 2023 internal report (shared with clients), the average D&O claim size in India is approximately ₹1.6 crore, with a notable rise in regulatory and shareholder claims post-COVID.
With regulators becoming stricter and activist shareholders becoming more vocal, the liability risk profile for directors is only growing.
The Role of Risk Advisors and Insurance Brokers
D&O Insurance isn’t just a checkbox—it’s a strategic tool that requires expert advice to get right. During M&A, insurance advisors play a vital role by:
- Reviewing existing D&O policies of both buyer and target
- Identifying gaps in coverage or compliance issues
- Structuring run-off cover and change-in-control clauses
- Negotiating tailored wordings and optimal premiums
Choosing an experienced broker can make a big difference when a real claim arises.
Best Practices for Managing D&O Coverage in M&A
To ensure robust protection during M&A, here are some key best practices Indian businesses should adopt:
- Conduct Thorough Due Diligence
Review the target company’s D&O history, past claims, regulatory issues, and existing insurance contracts. - Communicate with Stakeholders
Ensure directors, officers, and shareholders understand the scope and limitations of the D&O Policy. - Ensure Seamless Policy Transition
Work with both insurers to avoid coverage gaps when merging policies or switching insurers. - Update Coverage Post-Integration
Post-deal, reassess exposure levels and amend the policy to reflect the new risk landscape.
Final Thoughts:
Mergers and acquisitions are high-impact, high-stakes moves. While they open doors to expansion, innovation, and transformation, they also put decision-makers in the legal crosshairs.
D&O Insurance isn’t a luxury—it’s a necessity. Especially during M&A, where every decision can be scrutinised and leadership faces exposure from multiple fronts. A well-structured D&O Policy with appropriate limits, run-off cover, and tailored wording can be the safety net that allows leaders to make bold moves without fearing personal loss.
So if you are planning, advising, or executing a merger or acquisition in India—don’t let D&O risks slip through the cracks. Work with experts, review policies carefully, and give your leadership the protection they deserve.
