D&O Policy Coverage: Start-up and Businesses

In the course of building the startup even the well intentioned senior members sometimes make wrong decisions, which might cause huge setbacks to the company, group of individuals or a single individual. This decision can even expose the personal assets of one or all CXO’s/Directors/Board members. You need to pay only nominal amount of Rs 7K-10K annual premium for 50 lakh D&O coverage.

Table of Contents

● Who may challenge the actions of Directors & Officers?

● How to protect them from these Risks?

● Why is a decision of Directors & Officers is Challenged?

● Who needs Directors & Officers Insurance?

● How to get Directors & Officers Insurance?

● Conclusion

Who can file a lawsuit against Directors & Officers?

Employees, shareholders, clients, vendors can file lawsuits against Directors & Officers. Action may be brought against them under Civil Law, Criminal Law or Consumer Forum in the following forms including but not limited to:

● Neglect resulting in a loss to shareholders or other entities

● Director/officer committing a Wrongful Act in their capacity as directors and officers of the company.

● Allegations or suits brought by Shareholders alleging:

Inadequate or inaccurate disclosures, Dishonesty or Fraud

Financial Performance and Bankruptcy

Gross Mismanagement

Conflict of Interest

Misuse of inside information

● Allegations or suits brought by Employees alleging:

Breach of Employment Contract

Employment Practices Liability like

■ Discrimination

■ sexual harassment,

■ unfair dismissal,

■ invasion of privacy,

■ failure to provide a proper or safe working environment

● Allegations or suits brought by Customers and Clients alleging:

Lender Liability

Deceptive Trade Practices

Product or Service related claims

● Allegations or suits brought by Competitors/ Clients alleging:

Antitrust

Copyright and Patent Infringement

Business Interference

Product and company defamation

Deceptive Trade Practices

● Allegations or suits brought by Government and Regulators alleging:

Dishonesty and Fraud

Securities Violation

● Allegations or suits brought by Directors/The Official Receiver/ Liquidator/The Public/The Company/Creditors.

How to Protect Yourself from the Risks?

There are a number of steps that directors and officers can take to protect themselves from above mentioned risks in India. Some of the most important ones include:

Get D&O Insurance: The company can avail Directors and Officers insurance on behalf of the directors and the officers/executives to indemnify them against any liability arising out of default, misfeasance, negligence, breach of duty & trust. Every business, whether established, raising funds, or with a corporate board should get D&O Insurance because it's one of those "must have" policies.

Create and promote HR policies: Usually in an early or growth stage startups the employees occupying a management or supervisory capacity to make decisions on a company's behalf are young individuals including the co-founders themselves making them more susceptible to committing mistakes that can lead into an action from the aggrieved. The Human resource department, whether in house or outsourced should focus on policies like POSH and focus on adherence to employment compliances to educate the employees.

Setup finance and legal processes: With growing clients, expanding markets, the legal liabilities also increase a team to cross examine and create agreements and contracts. The team needs a strong mechanism to keep a check on the corporate funds to avoid any misuse, government and regulatory compliances.

Why are the decisions of Directors and Officers challenged?

It is the directors’ responsibility to manage and control the company and hence by extension it becomes directors’ liability personally to pay losses suffered by the Company. In the above instances, decisions of the directors and officers not only place the company at risk from actions, they also place themselves personally at risk. A director’s personal liability is unlimited in which case all the personal assets are at risk. Directors become jointly and severally liable, the directors and officers simply compensate for the loss and the damage caused, letting executives focus on the growth of your company.

Who needs Directors and Officers Insurance?

Anyone who is occupying a management or supervisory capacity to make decisions on a company's behalf should demand or confirm from its company to have a Directors and Officers insurance e.g. a manager, shareholder, investor, director, head of department etc. As in case of a legal action the company will not be as liable as the employee itself to bear the cost of a damage or loss made even without an ill intention. It is a responsibility of the company to get the D&O insurance for their key members of the organization. From an organization with 1-person team to listed companies, all companies should get Directors and Officers insurance to attract, protect and retain the most valuable.

As per Companies Act, 2013 under Sections 197(13) and 149(8) r/w Schedule IV., all companies are recommended, encouraged and as per SEBI, all listed companies mandated to have Directors and Officers Liability Insurance to cover for their unforeseen liabilities.

How to get Directors & Officers Insurance?

Well…just 5 minutes. Yes, you get the best recommendation at Bima5Kavach in no time. Once you leave the details with us. Our insurance experts will call you and make you understand about the products and its technical implications.

Conclusion:

Once you have started onboarding senior members in your team, Directors & Officers Insurance becomes an essential policy, so that they can concentrate on their work to take the company on the growth path. You may also find mention of directors and officers policy on your term sheet and few stakeholders are willing to join your ambition only if they feel secured with a D&O policy in place.

Bimakavach helps you insure simply, cover smartly.