The Growing Importance Of D&O Policy In Today's Corporate Climate

Directors' and officers' liability Insurance is an insurance policy that pays the directors and officers, or to the organization itself, several costs such as legal costs, public relation costs, etc

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By Tarun Mathur

Freepik

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If 2021 was the year of The Great Resignation, 2022 certainly seemed to be the year of The Big Lay-off, considering recent announcements of some major organizations getting onto the bandwagon. Downsizing, though perceived as an obvious one-shot way to cost-cutting, does not come without its own set of risks and challenges. Given the recent turn of events in the market, lay-offs might only be a plausible solution for some organizations, albeit a drastic one. While reasons cited for the same could be many, budget constraint is often considered to be the most prominent one. However, taking into account the massive impact of such a step, the organization needs to be prepared for the possibility of several associated risks, like that of lawsuits, which simply cannot be ignored.

However, it is important to note that the risk of lawsuits is not just limited to staff-reduction. Irrespective of downsizing, lawsuits can occur any time as a consequence of any action from the personnel of a company. Such risks come with tremendous financial liability which can potentially drain an organization in ways more than one. So, how to ensure your organization stays protected in light of such events? The answer is opting for an adequate liability insurance cover. Specifically, in today's corporate climate, a directors and officers (D&O) policy holds utmost importance. Here's detailing out what the policy means, what it entails, and why it's crucial for an organization's and its employees' financial well-being.

What is D&O policy?

Directors' and officers' liability Insurance is an insurance policy that pays the directors and officers, or to the organization itself, several costs such as legal costs, public relation costs, etc., because of a legal action brought onto them for any alleged wrongful acts in their capacity as directors and officers.

The policy may protect the insured from claims arising out of various instances such as wrongful termination, sexual harassment, libel and slander, whistleblowing, tax issues, negligence and regulatory response.

Why an organization must invest in a D&O policy

Protection against personal liability and financial losses: While there are several reasons for an organization to invest in a directors and officers policy, the key reason is to ensure the protection against personal liability in case the insured gets sued in their capacity as directors or officers while serving in their corporate roles. In the absence of which, they will always be on the hook for any settlements levied against them.

Helps attract and retain top talent: In today's corporate world where top management can get fragile with even one exit, it can be difficult to attract and retain quality talent, especially in hazard-prone industries. Nonetheless, leadership roles can be difficult to fill unless they are protected from personal liability. Businesses can attract and retain top talent by purchasing D&O insurance on behalf of its employees and assure them for coverages in case of any claim instances
Risk not limited to just public companies: It is often perceived that the risk of such lawsuits is only associated with public firms and not private ones. However, the truth is that though D&O insurance is most associated with public firms, private enterprises are just as vulnerable to lawsuits. Indeed, private companies are frequently sued by employees, shareholders, and other third parties, making D&O insurance a critical component of any company's risk management strategy.
Draw potential investors: Enterprises need capital to not just survive, but thrive and expand. This needs the inflow of funds from investors who would want their interest protected as well. Quite understandably, the potential investors would favor an organization that have a strong D&O insurance policy to lower their risk and potential exposure to lawsuits.
Exclusions under D&O policy

Like any insurance policy, D&O policy is also subject to some exclusions that the organisations must be mindful of, some of them are:

Coverage until final adjudication: The policy picks up the defense cost only until final adjudication. If the insured party is found guilty of the offence, no further costs will be covered.

  • Loss arising from claims arising from bodily injury or property damage (except for employment practices liability claims, libel, slander, defamation, violation of the right to privacy, or tangible property damage which can be covered as add-on covers under the policy).
  • Prior pending litigation claims.
  • Loss relating to fraudulent or criminal misconduct.
  • Loss relating to illegal profits or remuneration to which the insured was not legally entitled.

In a nutshell, the corporate world is evolving and it is imperative for organisations to match the pace with this evolution. Given the current situation, the importance of insurance is not just limited to the standard coverage but also extending to the protection it offers in the form of these new-age policies. While no one can predict and avert these major risks, they can most certainly be financially prepared to battle the large expenses that come with them.

Tarun Mathur

Co-founder & chief business officer-General Insurance, Policybazaar.com

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