Directors and Officers (D&O) Liability Insurance is a policy aimed at safeguarding the possible legal liabilities of directors, board members, and other individuals in a management/supervisory position in the event that they are indicted for decisions made to run the business. Directors and Officers Insurance protects the directors' and officers' personal assets and compensates for settlements and legal costs incurred as a result of such lawsuits and litigations.
- Coverage Scope: D&O insurance typically covers defense costs, settlements, and judgments resulting from lawsuits alleging wrongful acts, errors, or omissions committed by directors and officers in their managerial capacities.
- Personal Liability Protection: D&O insurance protects the personal assets of directors and officers, shielding them from financial losses incurred as a result of legal claims or regulatory investigations.
- Corporate Reimbursement: D&O insurance may also reimburse the company for indemnification payments made to directors and officers for covered claims, ensuring adequate financial resources to support corporate governance and risk management.
- Entity Coverage: D&O policies may extend coverage to the company itself for certain liabilities, such as securities litigation, shareholder derivative actions, or employment practices claims, providing comprehensive protection for both individuals and the organization.
- Policy Exclusions: While D&O insurance offers broad coverage, certain exclusions may apply, such as intentional misconduct, fraud, illegal acts, or bodily injury and property damage claims, which are typically covered under other insurance policies.
- Importance for Recruitment: D&O insurance is crucial for attracting and retaining qualified directors and officers, as it provides assurance that their personal assets are protected against potential legal liabilities arising from their corporate duties.
- Regulatory Compliance: D&O insurance helps companies comply with regulatory requirements and fiduciary duties by ensuring adequate financial resources to defend against legal claims and fulfill indemnification obligations to directors and officers.
- Tailored Coverage: D&O insurance policies can be customized to meet the specific needs and risk exposures of different companies, including coverage limits, deductible options, policy extensions, and endorsements, ensuring comprehensive protection against liability risks.
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Here are the Advantages of Officers Liability Insurance
Certain important advantages provided by Directors and Officers Liability Insurance or Directors Liability Insurance are listed below-
1.Provides protection for individual directors and officers against personal liability
To survive amidst tough competition, certain important yet seemingly unpopular business decisions need to be made by company management. At any time, one or more of these decisions may offend any of the stakeholders. As a result, such actions expose the directors and officers (or other employees in a "decision-making position") to potential lawsuits from customers, competitors, regulators, employees, shareholders, and government agencies.
A pricey lawsuit can have a significant influence on the liability of directors. In such cases, a D&O Insurance Policy is important because it can protect the personal wealth of such employees from potential legal obligations. A director's liability includes any losses or damages the company suffers as a result of a breach on his or her part or due to their failure to disclose a personal financial interest.
2. Provides protection to the company
Directors’ and officers’ liability insurance provides coverage for losses that the company incurs as a result of paying for damages and defense costs for claims brought against its directors and officers. In other words, this coverage provides reimbursement to the company for the costs it has incurred in defense of its directors and officers. A D&O insurance policy helps mitigate the risk associated with leadership by providing coverage for legal defense costs, settlements, and judgments resulting from covered claims. Thus, this coverage can help protect the financial stability of the company. It also helps mitigate the risk of bankruptcy or insolvency that may be caused by unexpected and huge legal expenses or damages.
3. Helps attract and retain the best talents
Directors and Officers Insurance (D&O) provides a safety net that reduces personal risk and financial exposure for directors, officers, or any other employee in a decision-making position. Therefore, it’s quite normal for a potential director to look for D&O insurance before joining the Board of your business. This is to ensure that your company provides adequate protection against directors' liabilities stemming from a management choice taken later on. Hence, if you want to recruit and retain directors with a high pedigree in your organization, it's time to consider D&O insurance, if you don't currently have it. The growth of the insurance business of a company depends highly on the best talents.
Moreover, companies that offer D&O Insurance Coverage can differentiate themselves from competitors that do not offer such coverage. This can make the company more attractive to talented individuals who are looking for a strong benefits package. Having a D&O Insurance Policy in place demonstrates a commitment to good corporate governance. This can help to attract individuals who value these principles and are looking for a company that takes them seriously.
4. Helps enhance the reputation of your company
Having Officers & Directors Liability Insurance in place can demonstrate your commitment to corporate governance and risk management. Thus, it helps enhance the reputation of your company and provides you with a competitive advantage. By having a D&O insurance policy in place, you can send a message that your business is committed to protecting the interests of its stakeholders, including directors and officers. Moreover, a company that has a D&O insurance policy is more likely to be transparent about its governance practices. This, in turn, can help increase investor confidence and trust in the company.
5. Important for small businesses
Always keep in mind that just because you own a small or medium-sized business does not mean you are immune to imminent lawsuits. A pricey lawsuit might have a significant influence on the personal wealth of your company's leaders. In the case of a small company, safety from Directors and Officers Insurance is even more important because the owner's or any key employee's personal net worth may be linked to the financial health of the company. When possibly damaging litigation arises, a small business may lack the financial 'muscle power' of larger corporations to cope with it.
What is Included in Directors and Officers Liability Insurance (D&O Insurance)?
Generally, a D&O insurance policy provides the following covers to businesses-
1. The dedicated additional limit for Non-Executive Directors and Officers
You get an extra layer of protection that is added to the overall coverage limit for non-executive directors and officers of a company. In the event of a lawsuit or claim against a non-executive director or officer, all loss or damage up to this additional limit will be covered. But this is only available where there is no other source of indemnification available to the Non-Executive Director or officer, after exhaustion of the Limit of Liability or other available insurance.
2. Emergency Cost
If the insurer’s written consent cannot reasonably be received before defense costs are incurred, the Insurer would agree to provide retrospective approval to cover such costs. This is for till the time the insured can seek such written consent. This time limit is usually for a period of 30 days from the date of the claim and may vary from one insurer to another. Within this time, the insured shall give written intimation to the Insurer of the claim that was the subject of the emergency, along with reasons why the emergency existed.
3. Legal representation cover and Interpretative Counsel Costs
It includes defense costs incurred by an insured along with the cost of hiring a lawyer to represent the company in court. When an interpretative counsel is hired within the home jurisdiction to understand the legal implications of the case – their expenses are also covered.
4. Bail and Bond Costs
D&O policy covers the costs of securing bail and bond for directors and officers, which may be in connection with any criminal proceedings arising from their duties.
5. Public Relations cover
It reimburses the costs associated with managing and mitigating the negative impact on the company's reputation, arising out of duties performed by the directors and officers on behalf of the company.
For example, the insurer will cover the costs associated with hiring a public relations firm to reduce or prevent the effects of negative publicity which the insured believes may result in a claim or an inquiry.
6. Discovery Period for Retired Directors & Officers-a minimum of 7 years
If a retired director is sued for a wrongful act that occurred during his tenure as a director, he can still make a claim under the D&O insurance policy for up to 7 years after the policy has expired. However, such claims should be for wrongful acts and inquiries that may have occurred prior to the effective date of policy termination or non-renewal. No additional premium is required for such an extended Reporting Period with respect to retired Directors & Officers, provided this policy is not renewed or replaced with any other policy that gives them similar management liability cover.
7. Discovery Period
If the policy is terminated or not renewed (for reasons other than termination by the insurer for non-payment of premium) and no event has occurred, the insured is granted an extended period to discover and report any claim. However, such claims should be for wrongful acts occurring prior to, and investigations into conduct prior to, the effective date of termination or non-renewal.
8. Automatic Cover for New Subsidiary
It automatically provides protection to new subsidiaries of a company that are acquired or created during the policy period. The insured should give the insurer sufficient details so that the insurer can assess and evaluate the insurer’s potential increase in exposure after such creation or acquisition.
9. Extradition Cover
This coverage protects a company if a director or officer is arrested or detained in a foreign country and the company needs to pay for the costs associated with his extradition back to the home country.
For example, if a director or officer of a company is travelling abroad and gets arrested or detained in a foreign country, this coverage would provide protection for the costs associated with his extradition proceedings (such as legal fees, travel expenses, and other related costs).
10. Corporate Manslaughter Cover
If death happens in the workplace, a company can be sued by the family of the victim, alleging that the company’s actions resulted in the death and the management failed to take reasonable care to prevent the death. In the event of such a claim, this coverage would provide protection for the costs associated with the legal defense, civil fines, penalties, reputation protection, crisis management, and other related costs.
11. Tax Liability Extension
Tax Liability means a liability that an Insured incurs personally for the unpaid taxes of an organization due to the financial impairment of the organization. It provides protection in case a director or officer has been held personally liable for taxes that the company was unable to pay due to liquidation or insolvency. This coverage applies only when the D&O can prove that they did not intentionally withhold such tax payments and circumstances were beyond their control. They also need to prove that the liability did not arise due to a criminal or wilful breach of any law or regulation.
12. Advancement of Defense Costs
In the event of a claim or inquiry, the insurer will pay the defense costs or legal representation expenses incurred by the insured before the final judgment or disposition of the case
13. Civil Fines and Penalties
By having this coverage, directors and officers can be protected from financial losses resulting from civil fines or penalties imposed on them. Besides paying the fines or penalties, it also covers the costs of defending against the charges that led to those fines or penalties. However, these fines and penalties are covered to the extent that such penalties are insurable under the law of the land where they are imposed and the country where the Insurer is located and up to the sub-limit mentioned in the policy.
14. Outside Directorship Cover (Exclusion of financial institution)
There is automatic protection to any company director, who is serving as a director in any outside company during the policy period. However, such coverage will apply to him for 90 days from the date of commencement of such outside directorship and will terminate post this period unless written intimation about the outside directorship is provided to the insurer within this period.
15. Order of payment clause
If payment of loss under this policy is due but the aggregate amount exceeds or may exceed the remaining limit of liability, the insurer will-
- First pay for the legal representative costs covered under the policy for individual directors and officers.
- Then, if any limits remain, payments will be made for such loss for which coverage is provided under another insuring clause in the policy.
16. No cancellation Clause
The policy protects company directors and officers from the risk of their insurance policy being canceled by the insurer before the policy's termination date.
For example, if a company is facing financial difficulties or is involved in a lawsuit, the insurer may choose to cancel the D&O policy to avoid paying out any claims. The no-cancellation clause coverage ensures that the insurer cannot cancel the policy unless certain conditions are met, such as non-payment of premium or deliberate fraud.
17. Professional Liability exclusion (Amended with carve back for failure to supervise)
D&O does not cover losses for any claims arising out of professional services provided by the insured to a third party. But it has a carve-back provision that if the claim arises from a failure to supervise, it will be covered.
This exclusion will not apply to claims by a Securities holder or group of Securities holders of the company, without the solicitation, voluntary assistance, or participation of the Insured.
18. Major Shareholder Exclusion Threshold
This exclusion may appear in some D&O policies and excludes coverage for claims made by large shareholders (usually more than 5 percent to 10 percent). It prevents a major shareholder or group of shareholders from purchasing D&O insurance coverage for themselves and using it to shield themselves from liability arising from their own actions. Also, such claims are often the result of infighting or personality conflicts between the major shareholders or shareholders and management, rather than caused by managerial errors involving substantive business decisions.
19. Court Attendance Costs
This coverage provides protection from reasonable costs and expenses incurred by the insured due to required attendance at court proceedings, hearings, trials, and depositions -related to the defense of a claim.
For example, if a director is required to attend court in connection with a lawsuit related to his actions as a director, this coverage can help to reimburse the director for expenses related to the said court attendance.
20. Court-Deprived Assets Additional Costs
This coverage helps to protect company directors and officers from additional legal and personal expenses associated with court-ordered assets being deprived of them because of claims made against them in their capacity as directors or officers. If an interim or interlocutory order comes across during the policy period, imposing confiscation, control, suspension, freezing, or a charge over real property or personal assets of the Insured - the insurer will cover personal expenses when such individuals are deprived of access to their personal assets. Common expenses include schooling, housing, utilities, and personal insurance.
21. Kidnap and Ransom Costs
This coverage provides relief from the costs associated with any event or connected series of events of kidnapping, seizing, or detaining an insured person by force or fraud, for the purpose of demanding ransom. It covers expenses such as ransom payments, reasonable fees of the kidnap consultants incurred in response to such an event, travel, accommodation, communication and payments to informants, and other such expenses related to the safe return of the individual.
22. Self-Reporting Expenses Cover
Get protection from the financial burden of expenses associated with self-reporting a potential violation or claim to the relevant Governmental, judiciary, or regulatory authorities. Such self-reporting should be pursuant to an obligation to inform such agency of matters leading to actual or potential regulatory issues, where failure to provide such information or delay in notifying, can itself result in larger consequential losses. This cover can help to reimburse the insured for expenses such as legal fees, investigation costs, and other costs associated with the self-report.
23. Investigation Costs
D&O policy covers the investigation cost. It covers the reasonable fees, costs, and expenses incurred (with the insurer’s prior written consent) by or on behalf of an insured person, in relation to preparing for and attending an investigation. Such an investigation should be in connection to a potential violation or claim against the insured in his or her capacity as a director and officer.
24. Crisis Communication Cover
It covers the reasonable costs, charges, fees, and expenses incurred by an organization, in attaining the services of any public relations firm or crisis management firm to advise the organization while managing public communication and restricting the disruption to the business in the event of a crisis.
For example, if a company’s brand value and reputation are damaged or could be damaged by an adverse media report, this coverage can help to reimburse the company for expenses such as hiring a public relations firm to manage the crisis and communicate with the public, as well as any other costs related to managing the crisis.
25. Employed Lawyer Extension
At times, hiring additional lawyers with specialized expertise becomes necessary to handle complex legal issues, such as intellectual property, employment law, or international trade. Also, If a company has operations in multiple states or countries, it may need additional lawyers to ensure compliance with local laws and regulations. In such cases, the cost of hiring additional lawyers is taken care of.
26. Occupational Health and Safety Defence Costs
It covers the defense costs, civil fines, and penalties resulting from a claim or legal representation costs originating from an Inquiry, in relation to any alleged breach of any Occupational Health and Safety (OHS) law or regulation, including but not limited to a Workplace Death.
27. Mitigation Costs Cover
It protects company directors and officers from the costs associated with mitigating a loss that may arise from a potential violation or claim against them in their capacity as a director or officers. It reimburses the insured for expenses such as hiring the services of a regulatory response team and/or a loss avoidance and mitigation team during the policy period.
What is Not Included in DNO Insurance?
1. Sanction Clause
The insurer is not liable to pay any claim or coverage under this policy if the provision of cover or payment of any claim would expose us to any sanction, restriction, or prohibition imposed by the United Nations resolutions, or the trade or economic sanctions, laws, or regulations of the European Union, United Kingdom, or the United States of America.
2. Product Liability
Product liability refers to the legal responsibility of manufacturers, distributors, and sellers for any harm or damage caused by a product they have produced or sold. It specifies that if a claim is made against the insured, alleging that a third party suffers property damage or bodily injury from the insured’s products, this policy will not cover such claims.
4. Money Laundering
Money laundering is a process where people hide the illegal source of their income and try to show the income as legal. If a claim is made against the insured for something related to money laundering, it will not be covered under this policy. This exclusion will only apply where the allegation has been established by written admission by the insured, court judgment, or other final adjudication.
5. Bribes and Commission
Directors & Officers policy excludes claims and losses arising from alleged acceptance of bribes and commissions by the insured. This exclusion will only apply where the allegation has been established by written admission by the insured, court judgment, or other final adjudication.
6. Financial Insolvency
Financial insolvency refers to the inability of a company or individual to pay their debts as they come due. It specifies that the policy will exclude cover for claims and/or loss arising from or sufficiently relating to the insolvency of an insured organization.
7. Asbestos
Asbestos is a naturally occurring mineral that has been used in various products, including construction materials and has been linked to various diseases such as lung cancer, mesothelioma, and asbestosis. If a claim is made against the insured arising out of allegations that he failed to disclose the danger or other claims related to asbestos, it will not be covered under this policy.
8. Opioids and Narcotics
If a claim is made against the insured for something related to opioids or narcotics, the same will not be covered under this policy. Claims or allegations in this category include (but are not limited to) falsely marketing opioids as non-addictive by the insured, failure of medical monitoring by the insured, and so on.
9. E Smoking Device
This policy excludes any claims or losses that are related to the manufacture, trade, storage, transportation, and advertisement of electronic smoking devices or e-cigarettes by or on behalf of the insured.
10. War
If a claim is made against the insured for events that happened because of war or warlike situations, the same will not be covered under this policy. Such events may include- invasion, acts of foreign adversaries, armed conflict or warlike operations (regardless of whether declared or not), rebellion, revolution, civil war, insurrection, civil commotion amounting to an uprising, military or usurped power, confiscation/nationalization/requisition/ destruction of/ damage to property by the Government, public or local authority and so on.
11. Future Offering of Securities (IPO)
If a claim is made against the insured that is related to a future offering of securities (IPO), the same will not be covered under this policy. Such events may include (but are not limited to)- providing misleading information in the prospectus, failure to disclose material information to potential investors, providing an untrue statement in the prospectus, and so on.
The footnote:
Hope from the discussion above, you have got a fair idea of the benefits associated with Directors and Officers Insurance. However, it is important to note that D&O insurance is not a guarantee of protection from financial loss, and coverage may be limited by policy exclusions and limitations. Therefore, it is always a good idea to carefully review the terms and conditions of a D&O insurance policy before purchasing it. Here at BimaKavach, answer 6-8 easy questions and you get the best recommendation. There is no tedious manual filling of multiple D&O license application forms.
Frequently Asked Questions ( FAQs)
- How complex is the process to claim D&O insurance?
When an organization or its risk management department gets aware of this kind of suit, the claim must be described to the insurance provider. The provider will then determine if the claim is covered by their D&O Insurance policy. If so, the insurer will reimburse the costs of the defence. If the case is subsequently lost, the insurer will cover the financial losses too. On the other hand, the insurer may avoid payment if the organization deliberately submits incorrect information or fails to disclose material information.
- What does D&O Insurance not cover?
D&O Insurance does not typically cover the following –
- Fraudulent & Dishonest Acts - Fines and penalties imposed on executives who commit fraudulent and harmful acts purposefully. Yet, well-crafted exclusions in the coverage are in place for people who were ignorant of such fraud.
- Professional Services Claims - Claims related to omissions, errors, and negligence while providing professional services.
- Deliberate acts of violating a law, contract, or regulation, Cyber Threats-Data breaches, and cyber attacks
- Third-Party Injury - If a visitor gets hurt on your business premises
- Misappropriation or infringement of patents or trade secrets
- Exposures related to mergers & acquisition
2. What can influence the reasonable level of D&O coverage?
Depending on its requirements, business strategy, and financial status, an organisation can choose any D&O coverage limit. Directors' Liability Insurance quotes may vary from company to company. Some of the things that can influence a reasonable level of D&O insurance coverage are as follows:
Risk appetite -The level of your D&O coverage can be determined by your willingness to tolerate risk. If your business is risk-averse, you can choose a lesser retention amount before the insurance coverage kicks in. Unfortunately, this will raise the policy's cost. If, on the other hand, you are more inclined to manage risk, you can choose a higher retention amount, lowering the premium.
Financial background - If your company is in good financial condition, is growing steadily and your debt management is efficient enough, you may be able to get away with a low-cost D&O policy. The inverse is also true.
Company Size -This is the most prevalent factor. A company's size is defined not only by its employee strength. You can also consider your company's annual revenue, total investment, number of paying clients, and other variables when determining its size.
Time spent in the business - If your company is new, you are more likely to have a shorter track record of successful management and a less consistent revenue stream. As a result, insurance companies will face increased liabilities. To determine the coverage limit, the provider will also evaluate mergers or acquisitions, recent substantial developments that have affected your business, changes in the company's financial condition and shareholder agreements, and so on.
Speak to BimaKavach representatives. We help you avail the best quotes from reputed insurers.
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Insurance Journal's top D&O stories of 2023
The Silicon Valley Bank collapse and its D&O repercussions
Following the downfall of Silicon Valley in March, attention shifted towards a cautionary AM Best commentary directed at the insurance industry. If it weren't for the intervention of the federal government to protect SVB depositors, there could have been substantial claims faced by D&O insurance providers serving startups and venture capitalists, as well as financial institutions that support them. According to AM Best, this incident underscores the immense significance of enterprise risk management, asset/liability management, and liquidity profiles when interest rates are on the rise.
In May, a bankruptcy judge permitted SVB's parent company to access the $210 million insurance coverage provided by directors and officers liability policies. This allowance aimed to support their defense against litigation resulting from the bank's collapse. The objection raised by the Committee of Unsecured Creditors regarding this expenditure was countered by Martin Glenn, chief bankruptcy judge for the Southern District of New York. He pointed out that according to the insurance policies themselves, priority is given to the bank's directors and officers in terms of receiving proceeds from these D&O policies.
Excess D&O Lawsuit Makes Headlines During FTX Fallout
After the collapse of global cryptocurrency exchange FTX, there was a brief period where readers were closely watching developments regarding excess directors and officers (D&O) insurance. In October, the founder of FTX, Sam Bankman-Fried, initiated legal proceedings against his insurance company to obtain payment for legal costs. However, he dropped this lawsuit in November shortly after being convicted of one of the largest financial frauds ever recorded. Kevin M. LaCroix, executive vice president at RT ProExec (a division of RT Specialty), discussed the coverage dispute in a blog post on D&O Diary which raised intriguing questions about how D&O coverage is distributed.
Exclusion ruling reversed against Towers Watson
The Fourth Circuit Court of Appeals ruled in May that Towers Watson is ineligible to receive $80 million in insurance to cover settlements of shareholder lawsuits related to the merger between Towers Watson and Willis in 2015.
Towers Watson won a coverage victory in federal district court in Alexandria in 2021, but was later denied a rehearing by a federal appeals court in Richmond.
The disagreement over coverage revolved around a provision known as the "bump-up" exclusion in Towers Watson's D&O liability policies from 2015. This exclusion typically denies coverage for losses arising from judgments or settlements relating to claims where the insured party seeks an increase in the price paid during an acquisition. Shareholders of Towers Watson filed multiple lawsuits in Virginia and Delaware against the company's chairman, CEO, and other individuals. They claimed that they were given less than fair market value for their shares in the merger.
The D&O Big Picture Discussions took center stage in the spring
Several articles published from March to May discussed concerns raised by experts about the state of the D&O landscape. A report by AM Best questioned the sustainability of the rate and price increase reprieve, while Dan Beatty and Erin Zimmerman pointed out that insurers are grappling with a soft underwriting market at a time when claims are becoming more frequent and severe. Additionally, Fitch Ratings analysts estimated that combined ratios for D&O liability remained below breakeven in 2022 but also highlighted how competition-driven price declines and economic factors play a role in this situation.
D&O Market Won't Go Down the Drain at W.R. Berkley
During a conference call with analysts regarding the company's first-quarter earnings, President and CEO of W.R. Berkley Corp., Robert Berkley, expressed concern over the declining rates and pricing adequacy in the directors and officers (D&O) marketplace, particularly for large accounts.
He made it clear that their insurance company would not be following the trend of other insurers who were lowering prices to remain competitive in this challenging market. Berkley noted that there has been an influx of new players entering the D&O market due to its low barriers to entry; however, this increase in supply has not been met with sufficient demand as evidenced by a significant reduction in IPOs.
