Investing in Directors and Officers (D&O) liability insurance policy is a prudent business practice primarily for these 3 reasons and at such a nominal cost. Are you adequately covered?
Directors and Officers Liability insurance secure company and its past, present and future directors and officers from any claims arising due to their ‘wrongful act’ made within the scope of managerial duties. Wrongful act refers to an actual or alleged error, neglect, omission, breach of duty, misstatement or a misleading statement. Although publically traded and larger multinational companies are exposed to highest risk, an entity of any size including non-profit organisation has potential to attract executives’ liability claims.
Here are few reasons for every company to necessarily opt for D&O liability insurance
Director and officers personal asset are at risk
Business decisions of the company’s key person can put his personal belongings at risk, as his personal net worth is linked. They are exposed to various legal risks while acting within their professional capacity. They are expected to bear the huge expense out of their pocket, should things go wrong. Having the D&O policy in place can give protection against these severe liabilities by covering both defence and settlement costs.
Defending lawsuits is a costly affair
Directors and officers are bound by their duty towards shareholders, customers, employees, regulators, vendors, suppliers, competitors and government bodies etc. This makes them vulnerable to various lawsuits. Here are the most common charges that they may face:
- An investor may hold them responsible for company’s bad performance due to mismanagement.
- Employees can sue them on the grounds of wrongful dismissal, sexual harassment and discrimination. For example, a female employee who was terminated then sues company and directors personally on the grounds of gender discrimination.
- Regulatory bodies may initiate an investigation for any wrongful act.
- Customers may approach the court for misrepresentation of products and deceptive trade practices. Along with company, managing directors can also be personally sued on the grounds of negligent misrepresentation and deceptive conduct.
- Creditors can sue the company’s directors and officers for not acting in their best interest if the company goes insolvent.
All these legal actions are complex to deal with and can be heavily expensive. If the company do not indemnify its key employees, it becomes a costly affair for them. And also these type of claims are not covered under general liability insurance policy. A simple answer to deal with these expensive claims is to have a Directors and Officers liability insurance policy with an adequate coverage. It also helps the listed company to safeguard itself from securities claims.
To acquire talent and to retain efficiency
Consequences of some of the important decisions can be unpredictable. Any legal actions arising out of it from third-party may put management in trouble which can ultimately affect directors’ and officers’ financial wealth and reputation. Hence, to keep the efficient management and to acquire new talent to run the company successfully and to make it grow, securing them with D&O liability insurance policy is a must.
Conclusion
Efficient management can be retained by providing them with the adequate protection against the litigations they may face due to their challenging work. A good D&O policy helps the company to perform and grow without affecting the risk exposure.
Every business is exposed to risk in terms of directors’ and officers’ liability claims. Comprehensive protection in the form of directors’ and officers’ liability insurance is thus a priority for any company to sustain the changes in. None of the company is exempted from exposures. Only the nature of risk exposure may vary. To manage these claims and litigations, D&O insurance is the top priority. In India, though D&O insurance is not mandatory as per The Companies Act, it’s an absolute necessity for any organisation to stay secured from various risk exposure.