A director of a company is appointed or elected internally by various shareholders to manage the company’s business and other affairs. A board of directors is a collection of such individuals. Companies can have five members or 20 on the board of directors depending of course on its size.
An officer meanwhile is appointed by the board of directors to manage and run the day-to-day operations of a company. The Chief Executive Officer, President, Chief Financial Officer, and Treasurer, are a few examples of an officer.
As executives and decision-makers, directors and officers are held responsible when things go wrong. Directors and officers are sued for various reasons, ranging from the wrongful termination of an employee’s contract, breach of fiduciary duty, theft of intellectual property, and such.
Such legal proceedings can result in devastating personal financial losses for the respondent. Directors’ and officers’ liability insurance was introduced to protect the individuals from financial loss.
Directors and Officers (D&O) Liability Insurance protects the personal assets of directors and officers of a corporation or non-profit in the event of a lawsuit against them by investors, competitors, vendors, or even employees, for alleged unlawful or fraudulent acts while managing the company.
Directors and Officers Liability Insurance can compensate a corporation or even a non-profit organization for the legal costs incurred during the defence of these individuals in such lawsuits.
Apart from the legal fees, the D&O policy also indemnifies the company or non-profit for settlements and other unforeseen costs incurred during or resulting from the case. A D&O policy coverage could extend to regulatory and criminal investigations as well.
Despite covering the legal costs, settlements, and other emergency expenses during a lawsuit, Directors and Officers Liability Insurance does have a few critical exclusions such as:
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Deliberate fraudulent acts of the board of directors or officers
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BIPD claim for bodily injury and such
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Prior claims, i.e. claims made or lawsuits filed before the insured purchased a Directors and Officers Liability Insurance policy
In India, political organizations, companies that do not have a registered office in India, banks, and other financial institutions are not eligible for Directors and Officers Liability Insurance.
Conclusion
Heavy is the head that wears the crown - the board of directors and the officers are responsible for the proper functioning of a corporation and revenue growth. More often than not, circumstances do arise where some stakeholders, be it an employee, investor, or competitor, may feel wronged and seek damages from the board of directors or the company’s officers.
Having a Directors and Officers Liability Insurance ensures that the personal assets of directors and officers remain protected during such lawsuits and that they do not suffer personal financial losses.