How Important Is Directors And Officers Liability Insurance For Your Company?

The Directors’ and Officers’ Liability Insurance (D&O) has been in India for some time now. The Companies Act, 2013 has put impetus of greater responsibilities to the independent directors and made provisions for the companies to use this kind of insurance to protect themselves. With these changes in the system and regulations, this insurance policy is also gaining momentum in India.

But, you will certainly ask how important is D&O for your organisation before you subscribe to any such policy?

The answer certainly will vary for different organisations, but certain common factors may drive home the importance of D&O Liability and whether you need to insure your company against such risk.

What Makes D&O Insurance Important?

• Companies Act 2013

The 2013 Act has introduced several new measures which have increased the duties and liabilities of directors considerably.  The Act has also imposed stringent penal provisions in case of breach of any laws. While many of these requirements were already there as a part of the Listing Agreement for the public limited and limited firms, the new requirements apply to even the non-listed companies.

The Act further allows for a class action lawsuit on the company or by the corporation to a person. This opens the door for multiple individuals in the company being sued by a single person or multiple parties for any decision of its officers. 

• Serious Fraud Investigations Office

SFIO is a multidisciplinary statutory body tasked with investigating and unraveling corporate frauds, mismanagement and misreporting issues.

• Greater Corporate Governance

Corporate Governance entails that the officers and directors of a company can make decisions which are in the best interest of the stakeholders. At times this can be difficult, and cost of indecision can be high. Therefore, organisations need a mechanism to be able to allow the decisions to flow freely.

• Increased Public Interest Litigation& Environmental Concerns

Organisations can be involved in many activities, some of which may need natural resources, and with the increasing environmental regulations and penalties it is important for the companies to be able to survive such financial setbacks if they are hit with one.

• Increasing Legal Costs

This may be of least concern for the financially sound organisations, but still, it doesn’t make sense to spend money where there is no fault of the organisation. D&O liability insurance can cover the legal defence costs in case of suits against companies due to a decision made in good faith by a director or an officer of the enterprise.

All these recent changes are only a glimpse of an increased risk of litigation and unexpected financial liabilities coming towards the business, and make the Directors and Officers Liability Insurance an essential backup plan for any business. These risks grow manifolds when a corporate startdealing internationally, and today’s global environment, where it is a dream of any business to go global, it is important for the firms to be able to sustain themselves even after facing such challenges.

Therefore, despite not being a mandatory provision for a firm, Directors’ and Officers’ Liability Policy certainly adds value to the corporate governance capabilities of the company, as it can protect the directors and officers against personal liabilities and can also ensure relief to the victims of corporate governance breakdowns.

Is It Costly?

The directors’ and officers’ liability insurance costs have come down drastically after Companies Act, 2013 came into force. So much so that the current premium prices are at least 20% of the premium amounts charged in 2006.

Therefore, it is not expensive, but you may have to work in close collaboration with the adviser on the amount of cover your organisation needs since the premium will depend on that. More importantly, you need to figure out the risk areas where the insurance will be useful for your company.

The benefits of right kind of D&O policy may not just be limited to contingencies and large organisations, even the start-ups need to take care of their responsibilities with such insurance. The new age of venture capitalists and funds are ensuring that the start-ups that they are funding fulfill this as one of the basic criteria.

How to Buy?

Directors’ and Officers’ Liability policies are not new to Indian markets, and thus many general insurers are providing this policy. What you will need is the one policy that will be more suitable to your organisation. You can make your decision after comparing from multiple insurers yourself, or you can go to a general insurance broker who can help in analysing and purchasing the best plan at the least prices.