Every company has managers, officers and directors who are vulnerable to external risks of claims incurred due to certain decisions undertaken in that position that may not go down well with the related parties relevant to the business. These related parties may include the vendors, customers, employees, contractors, and sub-contractors.
Also, there are chances that the company or some of its directors may be duped for various reasons like misrepresentation of company assets, fraud, not following the work ethics or misrepresentation of funds or breach of contracts.
How do you bear such costs that may go into saving the company’s reputation in the long-run? For such a situation, a business organisation needs to avail Directors and Officers liability insurance policy. The top managers, directors and officers are a key to the success of any organization, and therefore, it is recommended for all kinds of business organisations whether big or small.
If you are still giving it a deep thought, we present to you 5 possible cases/situations when you will need this insurance policy the most:
Dissatisfied Employees on Account of Layoffs
Sometimes, you might need to take the toughest decision of laying off some employees to cut the cost of production. Such decisions can be taken at the time when the economy is facing recession or simply because the organisation is incurring loss even though the market conditions are favourable.
But, the employees might not have the same thinking. They may feel that partiality has been done on the part of the company, directors or top management. What if, such employees decide to sue the directors or the entity in such cases?
This is the time when your D&O liability policy will come into effect to cover the cost of such lawsuits or settle the case outside court.
As per the newspaper report, the sacking of Cyrus Mistry and its fallout might evoke a claim under the D&O insurance policy cover bought by Tata Sons. The policy covers the top management level of the company from the legal actions initiated by shareholders, employees or authorities against the decisions taken by in the course of their duties. The D&O insurance cover of Tata is estimated to be more than $50 million.
Litigation Arising Out of Bankruptcy
This is the most unfortunate and uncalled situation for your organisation. But, the situation can never be ruled out in the turbulent market competition.
However, the company going bankrupt is not only a cause of worry for the directors, officers or the top management. It also affects the related parties like investors, vendors and others. These may decide to file a lawsuit on the company because of the huge losses that their own business suffers due to this bankruptcy.
Such a situation might emerge immediately and in case of a bankrupt company, it will be difficult to incur even the legal fees. A D&O insurance policy helps in such cases as it will help cover the legal costs of these lawsuits.
Mandatory Requirement of Certain Investors
You always require investment to run a business. Certain venture capitalists and financiers may demand a D&O policy prior to investing in your company. This is just to secure themselves from any claims made on them that they will need to pay themselves if such a policy does not exist. So, in order to secure themselves and their investments, they would demand that the company must have a D&O insurance policy. Therefore, to attract investors, you will need to provide them this insurance policy as a security.
Lawsuits by Competitors For The “Employee Piracy”
There may be several differences between you and your competitors. One of them could be related to the “employee piracy”. It means employment of someone who was earlier working with the competitor. If such an employee was really important in the functioning of your rival company, it may be that the rival might sue your organisation or its directors for theft of intellectual property and business information.
In such cases, a general liability insurance won’t cover the costs of legal expenses. A D&O policy is must for protecting your business.
Protecting the Organisational Reputation
In any kind of lawsuit done against a company or its top management, the company’s reputation is always at stake. But if you have a D&O, it helps in protecting the reputation of the organisation.
So, it is better to adopt a director and office’s liability insurance policy to ensure safety and security for the entity as well as its top directors and officers.