Directors and officers liability: what it covers and why boards are asking now

Directors and officers liability insurance protects individuals - not the company - against claims arising from decisions taken in their corporate capacity. It exists because directors in India can be held personally liable, and personal liability reaches personal assets.

The three sides

Side A covers directors and officers directly where the company cannot indemnify them, whether because it is prohibited from doing so or because it is insolvent. This is the part that protects a director's own money and the part that matters most to the individual.

Side B reimburses the company when it has indemnified its directors. Side C, where purchased, covers the entity itself for securities claims. Most policies for private companies are built around A and B.

What triggers a claim

Allegations of breach of fiduciary duty, mismanagement, misstatements in accounts or offer documents, wrongful trading, and regulatory investigations. Claims come from shareholders, regulators, employees, creditors, customers and occasionally from the company itself after a change of control.

The largest single cost in most D&O matters is defence. Regulatory investigations run for years and consume legal fees regardless of whether any finding is ultimately made, and D&O funds that defence as it is incurred.

Most D&O money is spent on defending directors, not on compensating claimants.

Why the exposure has grown

India's data protection framework has made data governance a board-level responsibility. Failure to implement adequate security safeguards, inadequate vendor due diligence and delayed breach response can be characterised as board-level neglect, which converts a technology failure into a governance allegation against named individuals.

Insurers have responded by asking harder questions at underwriting about data governance, board oversight of cyber risk, and incident response readiness. Companies that can evidence these get better terms, and the reverse is also true.

The clauses to negotiate

Severability, which prevents one director's wrongdoing from voiding cover for innocent colleagues. The insured-versus-insured exclusion, which should carve out claims by a liquidator or by a whistleblower. Investigation costs, which should be covered before a formal claim is made rather than only afterwards.

And run-off cover. A D&O policy is written on a claims-made basis, so it responds to claims made during the policy period. A director who resigns today can be sued in three years for a decision taken last year, and only run-off cover, purchased for a defined number of years, addresses that. This is particularly important around a sale of the business.

Who needs it

Any company with external investors, an independent board, regulatory exposure or an intention to raise capital. Non-executive and independent directors increasingly treat it as a condition of accepting an appointment, and reasonably so - they carry the liability without the executive control.

Family-owned businesses often assume it does not apply to them. It applies whenever a person owes duties as a director, which is to say from the day the company was incorporated.