Essential Coverage and Exclusions in Directors & Officers Management Liability Insurance




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    Essential Coverage and Exclusions in Directors & Officers Management Liability Insurance

    Directors and Officers liability insurance is a liability insurance policy that provides liability coverage to the directors, officers and other key personnel working in an organisation towards any claims arising from their decisions and actions while employed with the organisation. The policy covers the legal defence costs and other related costs incurred by the organisation while defending such individuals against any lawsuits brought against them. It is to be noted that this policy does not compensate third parties for any bodily injury or property damage as it is intended to cover only the defence costs in fighting a legal battle. The policy was initially introduced to cover the directors and officers of an organisation but was later extended to all people in a decision-making role. The whole management team of an organisation can be covered under this policy.

    Let us understand the concept of D&O insurance with an example. For instance, let us assume that Ms Ancy was working with an FMCG company as CEO and had promised the company's investors to give 10% returns had they invested in a product she was developing to bring into the market.

    Essential Coverage and Exclusions in Directors & Officers Management Liability Insurance

    Unfortunately, the product didn't fare well in the market, and the returns were way below the promised figures. The investors had sued the CEO for misleading them with inflated returns, which were far from real. The reason behind the performance could not be ascertained immediately, but the CEO must fight the legal battle. For this, she can take the help of a D&O liability insurance policy which would provide her with the costs associated with a legal defence subject to the terms and conditions under the policy.


    The Directors, officers and other key personnel of an organization can be sued or alleged for wrongful acts related to:

    • Sexual harassment, Unfair trade or employment practices, workplace discrimination, retaliation, defamation, failure to promote etc.
    • Breach of duty and trust, misstatements or misleading statements, libel or slander, certain acts of omission or negligence.
    • Claims arising out of failure to comply with the regulations or laws
    • Inaccurate or insufficient disclosures led to claims against the Directors or other key personnel.

    Side A: Covers the claims and liabilities of officers in case the company refuses to pay or is financially unable to pay for the losses suffered by the officers and directors, and they have to protect themselves against demands, legal suits and allegations. The insurance policy would pay directly to the claimants on behalf of the directors and officers when their organisation cannot pay or is not allowed to pay legally.

    Side B: Covers the company from wrongful acts arising from allegations and leading to legal suits such as Employee harassment, workplace discrimination, gender discrimination, sexual harassment, caste discrimination, retaliation, defamation, failure to promote etc. Simply put, the organisation pays the directors and officers to fight the legal cases and then gets reimbursed from the insurance company under the D&O liability insurance policy.

    Side C: Covers the claims raised by the insured against their company for a wrongful act in connection with the trading of its securities.


    • The main exclusion under the D&O policy is the claims arising from bodily injury and property damage to third parties.
    • Claims arising out of deliberate, dishonest or fraudulent acts.
    • The policy doesn't cover salaries, wages, personal expenses, benefits or overhead expenses incurred by an insured person while defending legal suits against them.
    • Claims arising out of offering securities, either Public or private.
    • Claims made by major shareholders against other insured persons.
    • Claims that were filed before starting your policy would not be covered. For example, if a company purchased a D&O policy only after receiving a sexual harassment complaint, the claim would not be settled.
    • The policy doesn't cover prior and pending claims before the policy's inception. This is due to the reason that the policy works on claims incurred basis rather than on claims made basis.
    • The policy doesn't cover claims relating to misuse, illegal remuneration, or misrepresentation of the company's funds.
    • Contractual liability is not covered. For instance, if an organisation promises its client that in the event of a breach of contract, it would settle a certain amount as compensation, then such claims would not be covered under the D&O insurance policy as the contractual liability is assumed by the insured, which falls under the exclusion.
    • Other standard exclusions such as War and allied perils, radioactivity claims, workmen's compensation, criminal activity, bankruptcy, theft of intellectual property, and any other violation of statute or law.

    Add-ons & Key Features

    • Advancement of defense costs

      Advancement of defense costs in which a certain amount would be paid as an advance towards the defence costs incurred by the insured in defending the claims brought against them. This would be helpful to the insured if they are unable to pay for the defence costs or their company is unwilling or unable to pay for the defence costs arising out of liability claims.

    • Claims made principle

      Claims made principle which states that the claims should be made during the policy period for the claim to be settled. Prior claims reported under the previous policy would not be covered under the current policy period. The date of intimation of the claim and the alleged occurrence date of the incident would be the main focus of a claims-made policy. Notifying the insurance provider when you become aware of a claim is paramount to their protection and should always be addressed. For example, let us assume that ABC company has taken a D&O insurance policy for 2018-19 and received a sexual harassment complaint against one of its founders. But, the company should have informed the insurer during the policy period, assuming there is no need to inform as no legal case was filed and the policy expired in March 2019. When the claimant proceeded with legal options, the company informed the insurance company regarding the D&O claim, which was rejected by the insurer stating the claim should have been reported earlier as the policy is a claims-made policy.

    • Inception date & Retroactive date

      The inception date is the policy's start date, and the expiry date is the policy's end date. In general, a D&O policy can be given for 1 year with the inception date as the starting date and the expiry date as the policy's end date. Retroactive dates refer to dates before when an insurance policy first took effect. For example, let us assume that the policy's inception date is 1 January 2023. Still, the insured wants to extend the cover backwards until 1 January 2015, the first time the policy was taken. In such cases, the retrospective date is 1 January 2015, from which the coverage would be applicable under the D&O policy. The retroactive date is offered only if the policy is continuously renewed without any breaks. Insurance companies would ask for continuous D&O coverage, even with different insurers.

    • Right to defend cover

      Right to defend cover provides the insured with an option to defend their actions in a court of law and would provide a claim amount towards defence expenses. Intentional illegal acts are not covered under this section.

    • Cover for subsidiaries

      The D&O policy can also be extended to provide coverage for the directors and officers working in a subsidiary company. One D&O policy can be taken for all the subsidiary companies instead of individual policies for each company. In this way, the company's administrative burden can be reduced by reducing the number of policies to be operated.

    • Outside Directorship Liability

      There can be instances where the companies would ask their directors and officers to serve on the board of other companies. In such cases, if any claims are raised against the directors when working in outside companies, all such claims could be covered under the outside directorship liability add-on. For example, a director in an ABC company serves as a director on the board of XYZ non-profit organisation and must be covered for liability claims. All such claims would be covered under the Outside directorship liability add-on.

    • Insured vs Insured Cover

      Insured vs Insured cover is a provision in D&O insurance in which the policy pays for claims between the insureds under the policy. This provision occurs whenever an insured party initiates proceedings against another insured party. This provision must be applied carefully to prevent fraudulent claims when one insured party sues another to recover a part or the damage amount not covered under the D&O policy.

    • Cover for Retired directors

      The add-on covers past or retired company directors in the decision-making position. Their liability may end once they leave the organisation. Still, it may only be true in some cases, especially regarding directors or officers with decision-making abilities. An ex-director may be sued for his alleged wrongdoing during his employment, and they need to be covered under the D&O liability insurance to avail compensation for defending their claims.

    • Employment Practice Liability for Directors and Officers

      The D&O policy can be extended to cover liabilities arising out of employment practices in an organisation. Companies cannot claim for the complaints raised against them unless they have opted for an EPL extension under the D&O policy. Employment practices such as wrongful termination, unfair termination, discrimination on any grounds such as gender or race or caste or creed etc., sexual harassment, workplace harassment, breach of employment contract, retaliation etc.

    • Cover for failure/negligence in supervising Professional indemnity claims

      Professional indemnity claims can arise from the deficiency in service provided to the clients by the professionals working in an organisation. If such claims are not supervised, or the company fails or neglects to supervise such professional indemnity claims, then there could be a liability claim against the company citing failure in supervising the professional indemnity claims and the company needing to defend itself against such claims. The defence costs to defend such claims would be payable under this add-on in the D&O insurance policy.

    • Regulatory response cover

      The policy compensates for the expenses incurred for the regulatory response team only in response to a regulatory event that does not come under the purview of a claim or investigation. There can be severe outcomes for companies undergoing regulatory investigations, and all such outcomes can be compensated under the D&O cover.

    • Cover for Hiers, estates and legal representatives:

      The cover is designed to protect individuals appointed as executors, administrators or trustees of an estate against any claims that can arise due to their personal decisions.

    • Kidnap response cover

      In case of kidnapping, hijacking or wrongful detention of an insured person, the insurance company would pay the kidnap response costs after consultation with the kidnap consultants as per the terms and conditions of the policy. The policy does not provide for any ransom demanded by the kidnappers but provides response costs incurred due to kidnapping.

    Advantages of D&O liability insurance

    Saves from financial losses: The major advantage of a Directors and Officers liability insurance policy is that it saves you from financial losses. Since the liability claims are "unlimited" in nature, any amount could have to be paid as compensation, and one may even become bankrupt while paying the compensation. A D&O policy could protect you from all those financial losses, as the liability would be transferred to the insurance company. For instance, you were alleged of wrongdoing by your investor and sued for Rs.10 Cr, which is way beyond what you could afford. A D&O liability policy could help, as the policy would pay the claim. The policy would also be useful when your organisation cannot pay legal defence costs or is prevented due to some legal regulation.

    Helps fight legal cases: The major use or advantage of a D&O policy is that it would help you fight legal cases of alleged wrongdoing filed against you. Legal cases take a prolonged time in India, and without a steady income, it is difficult for directors or officers to fight legal cases. A D&O policy could pay for your legal defence costs by getting prior approval from the insurance company. One need not worry about the defence costs as the policy would cover the costs up to the limit mentioned under the policy.

    Gives boost to accept positions: There are instances where Directors and officers hesitate to accept certain positions which involve decision-making due to the fear that they might be held responsible if things go south. For instance, if there is a company where there is a legal case against the Director and were forced to resign, then it would be difficult to convince others to take up the position if proper legal support is not offered to the ex-director. Having a D&O policy would boost the morale of the directors to join a company or take bold decisions thinking that the D&O policy would help them fight the allegations against them.

    Talent retention: The other advantage of a D&O policy is the retention of existing talent. One can retain the existing directors and officers in the organisation by providing them with D&O liability cover, without which they would be forced to purchase a liability policy independently. Since there are wide applications of a D&O policy, every company should have a D&O policy that can safeguard the financial positions of the directors and officers working there. Liability claims can arise at any point, so the policy has an add-on covering the ex-directors and retired directors for claims arising from the decisions taken during their period.

    Claim Settlement Process in D&O Insurance

    Step 1: The first step of the D&O settlement process for insurance claims is to inform the insurer. The information can be given to the company by duly filling out the D&O claim settlement form. The claim settlement process would start after intimating the insurance company. In addition, the insurer should be informed of any legal costs that could arise in the future and if those costs are below or above the sum insured limit. One should also inform the insurance company regarding any legal notices received by the insured and if they plan to respond.

    Step 2: In the next step of the claims-settlement process, insurance providers initiate an investigation process. In consultation with the claim settlement team, the insurance company's legal team would work out the possibility of the claim amount and explore if the claim would be awarded in favour of the complaint or defendant. The surveyor would be deputed to investigate the claim and find out if the claim is acceptable under the coverage, and estimate the possible claim amount. Reports submitted will be forwarded to an insurance provider who can then process claims based on an insured's policy.

    Step 3: The insurance company would hold discussions with the insured customer after receiving the claim report and decide whether the claim comes within the scope of the policy. After confirming the scope of the claim, it would be settled by the insurer after factoring in any deductibles mentioned under the policy. Voluntary deductible and compulsory deductible would be calculated and factored under the policy.

    Need for an insurance broker in D&O insurance

    Suggests the best plans

    D&O liability policy is highly intricate in details, and one should pay close attention to the terms and conditions under the policy while taking it. For this, one should either be literate enough to understand the terms and conditions of liability policy or take an intermediary's help. An intermediary can be anyone, such as an Individual agent, Bank, Insurance broker etc. Out of all these, an insurance broker is said to have a thorough knowledge of D&O insurance. Insurance brokers such as Ethika insurance broking have a thorough understanding of Liability insurance plans and can suggest the best to the customer. Certain add-ons and other things are to be decided before purchasing the policy, and it would be advisable to take the help of an insurance broker before purchasing the policy. It would be difficult to make amendments to the policy during the policy period as the risk change would require inspection, and to avoid all these issues; one should consult insurance brokers and discuss their requirements before purchasing a D&O liability policy.

    Claim support

    The other important advantage of having an insurance broker for a D&O policy is that you can avail of the best claim support. An insurance broker could handle the policy's complex wording and legal cases with their in-house claim settlement team and the insurance company. Also, filing a claim under D&O requires a lot of time which might not be feasible for the organisation. An insurance broker can help you from filing and submitting the documents to processing the claim and, finally, claim settlement.


    Every privately or publicly-held business with an advisory Board or committee needs a D&O insurance policy to protect directors, officers, and employees with decision-making power. Some of them who can be insured under a D&O policy are Directors, Officers, an employee of a company, An outside entity director, A consultant appointed as a member of the company's board, a Trainee, an Employed lawyer, Spouse of the insured person, Administrators, legal heirs or representatives.

    For more information on Director's and Officer's Liability insurance policy, please visit our Ethika insurance website and book a call with our liability insurance experts and get the best insurance advice.