Directors and Officers Insurance

Frequently Asked Questions (FAQs) on Directors and Officers Insurance

1. What is Directors and Officers Insurance in simple terms?

Directors and Officers Insurance is a policy that protects company leaders — such as directors, founders, CXOs and board members — if they are personally sued for decisions made while performing their duties. It covers legal defence costs, settlements and regulatory investigation expenses, so their personal savings and property are not at risk.

2. Is Directors and Officers Insurance mandatory in India?

No, it is not legally mandatory. However, many investors, independent directors and board members expect companies to have D&O insurance before they join or invest. In listed companies and regulated sectors, it is considered a best practice for corporate governance.

3. Who can file a claim against directors or officers?

Claims can be made by:

• Shareholders or investors
  
• Employees (for wrongful termination, harassment, etc.)
  
• Creditors or banks
  
• Customers or competitors
  
• Government authorities such as SEBI, NCLT, MCA, RBI, Income Tax Department
  

4. Does D&O Insurance cover fraud or criminal acts?

No. Deliberate fraud, criminal activity or illegal personal gain is not covered. However, the policy will cover defence costs until a court proves guilt. Once fraud is legally established, coverage stops.

5. What types of costs are covered under a D&O policy?

• Lawyer and legal defence fees
  
• Court and arbitration expenses
  
• Settlement or compensation amounts (if legally permitted)
  
• Costs of responding to SEBI, MCA, RBI or NCLT investigations
  
• Bail bond costs and crisis management (in extended policies)
  

6. Are independent directors and advisors covered under D&O insurance?

Yes. Independent directors, advisory board members and non-executive directors can be covered if they are listed in the policy. Many experienced directors insist on D&O coverage before accepting a board position.

7. Does it cover past or retired directors?

Most policies cover past directors for decisions they made during their tenure. Some companies also choose to extend cover to retired directors for a fixed time after they step down, known as "run-off cover".

8. What is Side A, Side B and Side C cover in Directors and Officers Insurance?

9. Does a D&O policy cover employee-related disputes?

Yes, claims like wrongful termination, workplace discrimination or mismanagement of employee stock options can trigger a D&O policy if allegations are made against senior management or the board.

10. Does Directors and Officers Insurance cover penalties and fines imposed by regulators?

Not always. Indian law does not allow insurance companies to pay certain criminal fines or penalties. However, many D&O policies do cover legal defence costs and investigation expenses related to regulatory actions by SEBI, MCA, RBI or NCLT. Some financial penalties may also be covered if they are “insurable by law”.

11. What is not covered under Directors and Officers Insurance?

Common exclusions include:

• Proven fraud or criminal acts
  
• Intentional violation of law or personal illegal gains
  
• Bodily injury or property damage (covered under general liability policies instead)
  
• Prior known legal disputes or ongoing litigation before the policy was purchased
  
• Fines or penalties that are legally non-insurable
  

12. How long does Directors and Officers Insurance remain valid for a claim?

D&O policies operate on a “claims-made” basis. This means:

• The claim must be made while the policy is active or during the extended reporting period.
  
• The alleged wrongful act must happen after the retroactive date mentioned in the policy.
  Once the policy expires, claims for past actions are not covered unless run-off or tail coverage is purchased.
  

13. Can employees be covered under D&O insurance?

General employees are not covered. D&O insurance is designed for decision-makers — directors, officers and key managerial personnel. However, employees may be covered if they are named in a lawsuit alongside a director, or if they hold a managerial or compliance responsibility.

14. Does D&O insurance cover cyber risks or data breaches?

Only partly. If a data breach leads to allegations that directors failed to implement proper cybersecurity or governance controls, D&O insurance can cover legal defence costs. But for direct cyber losses, ransomware, data restoration or customer notifications, a separate Cyber Insurance policy is required.

15. Can Directors and Officers Insurance continue after a company is acquired, merged or shut down?

Yes. Companies can purchase run-off or extended reporting coverage, which protects former directors even after the company ceases to exist or is acquired. This is especially useful during mergers, acquisitions or liquidation, where old decisions may trigger claims later.