9 Reasons D&O Insurance Is Must For Organizations

by Rajveer khanna    Apr 06, 2017

insurance

“See you in court”— this tag line might have reminded you of one of the latest Bollywood films which has talked about the Indian legal system. It is common to find an individual who is being sued by another. However, what if an individual or creditor sue an organization or its directors? Yes, it is a hard reality, the number of legal cases against companies, especially directors have seen an upward trend.

Imagine, you are a director or officer of a company and someone tells you that you can lose your personal belonging (including your car and house) due to your business decisions. But this situation would have not affected you much if you had purchased a director liability insurance.

It is essential for every company to have a director & office insurance (D&O), in order to have some peace of mind. If you haven’t purchased the policy, we’ve put together the top reasons to buy a D&O insurance.

1. Personal assets of directors are at risk: If a director has been accused of breaching duties, their personal assets are at risk in case they don’t have any D&O insurance. 

2. Defending a legal action is an expensive affair: The legal costs and expenses in litigations involving directors are usually complex and costly.

3. Investors can file a case against you: It may sound unlikely, but things can go downward. If investors believe that they have incurred losses due to mismanagement of the company, they could approach the court to seek compensation. For instance, if any action of a director results in a drop-in share price, which leads to loss to shareholders and investors, then there is a high possibility that they may bring a class-action lawsuit against the company and directors.

4. Employees can sue directors: It is not only shareholders who can file a case against the directors as even employees reach the court to challenge the decision of the directors. It is a hard reality that in today’s corporate world, there has been a rise in the number of cases filed by employees, related to sexual harassment or wrongful dismissal. For example, in 2016, a sacked software engineer won case against HCL Tech. The court called his dismissal unlawful and asked the company to reinstate the petitioner with continuity of service and paid full salary along with other benefits.

5. Customers can take legal actions: In some cases, customers also reach the court against misrepresentations made in the advertisement materials and deceptive trade practices.

6. Enquiry initiated by regulatory authorities: Regulatory bodies, like SEBI, Revenue Department, etc.; can initiate enquiry against directors.

7. In case of bankruptcy or insolvency: If faced with bankruptcy, creditors can pursue legal action against directors if they think that they have not acted in their best interest.

8. Helps in attracting/retaining talent: Not having a comprehensive D&O may discourage talented employees from joining the company as they know will not be guarded against any legal case if arise in future.

9. D&O claims are not covered under any other policy: Most of the people believe that D&O claims are also covered under other liability insurance plans like professional indemnity. However, it is not true.

In short, a director is expected to work with the following principals:

- Duty of Care: It requires directors and officers to act diligently with regard to the management of the company’s affairs.

- Duty of Loyalty: It restricts directors and officers from using their position in their interest.

- Duty of Obedience: It requires directors and officers to ensure that the company is adhering to code of conduct. 

Any deviation from the above principals could pose the threat of legal actions against directors.

Let’s take a real life example. In 2016, Tata Sons sacked its director Cyrus Mistry who later made a statement that the company was taking some loss-making decisions on emotional grounds. As the company was listed in the USA, the risk of investor actions in that country was very high. However, the company had a director liability insurance, which covered the legal cost and other expenses.  

In conclusion, we can say that in recent years, the role of directors and officers has become more stringent and challenging, given the increasing responsibilities and litigation pressure. In most of the cases, directors and officers carry personal responsibility and liability with respect to their acts.

As a result, it is pertinent to go with a director liability insurance, which can safeguard directors and officers against the monetary burden of litigation and damage to their reputation. 

[Disclaimer: The views expressed in this article are solely those of the authors and do not necessarily represent or reflect the views of Trivone Media Network's or that of CXOToday's.]