Outside Directorship Extension Under Directors & Officers Policy

Directors of a company are responsible for major decisions that impact many.  Since they are trustees of the company’s assets and funds, they have a greater responsibility and have to exercise due diligence in the discharge of their duties and in decision making.  Any wrongful act committed such as errors and omissions, neglect or breach of duty that could lead to financial liability and the threat of civil and criminal action, for the company and to the director/officer himself.

In order to protect against such risks, companies take a Directors & Officers Policy or a D&O policy. This policy protects directors and officers from legal claims as a result of any wrongful actions committed by them when performing their duties.

In recent times companies are keen to utilize the expertise of outside directors which is called outside directorship.

These outside directors are not directly in the rolls of the company. Such outside directors are enrolled for their expertise and domain knowledge in specific areas to help in decision making. They bring leadership skills and experience to the company and are involved in skill development and training of employees.

Liability can arise on account of the decisions of the outside directors and companies usually prefer to take insurance coverage for such liabilities. The Directors & Officers liability policy usually takes care of the liabilities of the all directors, officers, employees on board however the outside directors who are called for important meetings do not have insurance cover. In order to include them in the insurance cover, outside directors’ liability cover is offered as an extension to the directors & officers liability policy.

The outside director’s liability extension extends coverage to an executive or officer of the insured company who is serving on the board as director of another company.

Outside directorship liability extension coverage

Extension is for inclusion of outside directors of the insured company and extension is allowed on payment of additional premium This extension is taken under the directors & officers liability policy which covers a wrongful act which could involve actual or alleged:

·       Error and Omission

·       Mis-statement

·       Misleading Statement

·       Neglect

·       Breach of Duty and Trust

·       Breach of warranty of authority or other acts

Special features of the extension

·       The cover extends to directors who are in service on the boards of non-profit companies. Bottom of Form

 

·       Policy is endorsed suitably to cover the liability of outside directors and additional premium paid.

Companies want their executives to be a director for other company boards for varied reasons such as:

•        To develop leadership skills and talent in their executives

•        Network base is increased within community leaders, if they are of the same community

•        A lot of experience is gained while making important decisions and leading a company.

•        A parent company will place their executive on the board of a subsidiary company to manage or oversee that sister concern

•        Management of financial investment in another company

Directors and Officers would have to ensure: -

•        Greater personal accountability

•        Deemed knowledge of regulations

•        Corporate governance adherence

•        Duty of care and due diligence

•        Stricter monitoring and supervision

 If above is not put in practice, there are increased chances of personal litigations against    the Directors and Officers and personal fortune of director is at peril. Insurance is therefore an effective risk transfer mechanism for this contingency.

Outside directorship cover has its own risks

Conflict of interest is the most important element in outside directorship roles. Example: While working for one company and utilizing the data, information position or capacity as a director for another company can lead to breach of confidence.

An outside director will be scrutinized to examine whether both organizations are separately dealt with properly in their capacity as director. This involves human skills and talent to be able to deliver the best in both capacities without conflicting interests

For example, an insurance company director is on the board of directors of a new entity. Taking decisions without profiting the parent company is the exact task for the outside director. He must discharge his duties in his capacity without benefiting his parent company.

Protection of data and information-Even if information is accidentally given out about one entity to another this accidental breach of confidence could be grounds for a lawsuit.

A lot of business opportunities can open up in course of the understanding of the organization and can be mutually used by both companies.

Outside Directorship Liability Coverage in D&O Insurance policy is a convenient extension to cover the liability that can arise in the discharge of duties as a director of another company and the extension helps address the huge liabilities that are likely to occur.

We at Zen insurance assist in choosing the right insurance cover for your business units. Plan your insurance program wisely and contact us for assistance.

Disclaimer:

Zen Insurance is an IRDAI registered broker which facilitates quick & accurate insurance broking services. We deal with only regulator approved products of insurers. We do not underwrite the products.