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Non Life Insurance - Covers for directors and officers are essential

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They protect the company and the individual from problems that can arise due to actions of the senior management

Last month, a fire in a brokerage firm at Coimbatore claimed the lives of four women employees. The branch manager was arrested but the company was able to bail him out through insurance from the Directors and Officers Liability Insurance (D&O) policy. This is just one example. There are several other decisions that managing directors and senior executives make that can lead to losses due to uncertain environment or other issues. However, shareholders or others impacted by their decisions could approach the courts for redressal. In such circumstances, both the company and the individual needs to be adequately armed with legal protection.

However, if a fraud is committed knowingly, as had happened in Satyams case, the executive will not be covered by the D&O policy. "A D&O insurance policy secures managers of companies against their personal liability for decisions taken and actions implemented by them in the everyday running of their function, department or company. This is very important since every decision taken by a manager affects so many people when executed," says Sushant Sarin, national head - liability lines, Tata AIG General Insurance.

According to Divya Gandhi, head of general insurance & principal officer at Emkay Insurance Brokers, till recently, only listed companies wary of being taken to court by shareholders or investors used to take D&O cover. But now, even smaller companies, such as a Limited Liability Partnership, are opting for such policies. "People are realising that small companies are also answerable to their stakeholders and they, too, can be taken to court for several issues," says Gandhi. However, a proprietorship or a partnership firm need not take a D&O cover. "The very term Director suggests that it is to be used only when there is a fiduciary relationship (that is someone who is acting for the benefit of another). Also, insurance companies may be wary of underwriting a proprietorship due to lack of transparency in its accounts and balance sheets," she adds.

While a D&O policy is not mandatory, its a recommended line of insurance, says Mukesh Kumar, member of executive management & head, strategy planning, HR and marketing, at HDFC ERGO. "D&O is a corporate product on an unnamed basis and covers all the directors and officers of the company," he adds. It enables its managers to discharge their ever increasing managerial responsibilities without fear or favour, says Sarin.

What does a D&O Liabilities policy cover?

It covers managers against their personal liability for decisions taken and actions implemented in their department or company. If the company has failed to adhere to the law and are facing regulatory action, the D&O policy covers managers against such personal liability to pay damages. The D&O policy broadly includes but is not limited to termination of employment, misrepresentation, discrimination, harassment, sexual harassment, failure to employ or promote, demotion, invasion of privacy, defamation or infliction of emotional distress.

Sometimes, the insurance company can customise the policy, depending on the companys requirement. For instance, if you are planning to take your company public, you can include the risk arising from the public offering under the D&O policy.

Will the policy cover all charges in case of legal action against the director?

The D&O policy pays all damages, awards of cost or settlements for which a director or officer is held liable. For instance, in the Phaneesh Murthy case, if there is to be a settlement, it would be paid out of the D&O cover. When a regulatory authority launches an investigation against a director or officer, the fees, costs and expenses incurred by the director or officer to prepare for and attend such investigation is paid by the D&O policy. It also covers bail bond and civil bond expenses, public relation expenses and even kidnap response costs.

How are the premiums fixed and who pays the premium?

The premium for a D&O policy take into account factors like a companys size (measured by its gross assets), its scale of operations (revenue), its geographical footprint (markets and manufacturing), the nature of the business itself (internet business v/s brick and mortar business), its employee strength and diversity, its listing in domestic and overseas exchanges, its market cap, its financial performance, its acquisition history and so on. As it is a corporate product, the policy is bought by the company. The premiums are paid by the company and not by individual employees.


* It is a policy offered by general insurance companies
* It is recommended for all directors, officers and top management of a company
* It covers managers against personal liability for his decisions or actions taken in the daily functioning of the company A proprietorship or a partnership need not take a D&O policy
* It pays all damages, awards of cost or settlements for which a director or officer is held liable
* It is a corporate product bought by the company Premiums are fixed based on companys assets, revenue, nature of business, employee size, whether it is listed in domestic and overseas exchanges

Source : BS back