Summary: This blog provides a comprehensive overview of Directors and Officers Liability Insurance policies in India, highlighting their coverage structure and associated nuances. It examines critical practical considerations, including knowledge attribution, coverage for past officers, fraud exclusions and the importance of truthful disclosures. It seeks to guide individuals on their rights as policyholders and aid them in entering into new policies or renegotiating their existing policies.
A directors and officers liability insurance policy (“D&O Policy”) is among the most prominent types of insurance policies that companies typically acquire. D&O Policies can be viewed as extensions of the doctrine of corporate veil, reinforcing the separate legal existence of a company and each of its constituents. Simply put, a D&O Policy offers liability coverage to a company, its directors, officers and employees against actions while performing their duties. Thus, by protecting the metaphorical ‘veil’ separating the corporate personality from its stakeholders, D&O Policies assume practical importance in today’s age of increasing legal complexities, where lawsuits and investigations are commonplace and costs are at an all-time high.
D&O Policy – Understanding the workings
While the nomenclature used in the policy document differs based on the insurer, the coverage clauses under a D&O Policy generally appear as ‘insuring clauses’ or ‘covers’. In common parlance, there are three ‘sides’ through which a D&O Policy provides coverage, and a claim can lie under any side:
- Side A cover: This is a personal safety net for directors and officers when no indemnity is provided by the company. The insurer directly pays the loss incurred by an insured person in connection with any alleged wrongdoing, thereby ensuring that the insured person does not go out of pocket while paying for legal costs, penalties or settlements.
- Side B cover: Commonly referred to as ‘corporate reimbursement coverage’. This side exists for the benefit of the company. The insured person gets indemnified by the company first, and the insurer reimburses the company to the extent of such indemnification. This is generally the industry practice, where claims are lodged by the company under Side B, after it has borne the financial liability on behalf of its officer(s).
- Side C cover: Also known as ‘entity coverage’, this side provides cover for the company itself. The insurer pays the loss incurred by the company, in connection with any alleged wrongdoing directly implicating the company, alongside its directors and officers. Such claims are most relevant in securities related regulatory actions.
In this manner, a claim can be made under a D&O Policy by both the company as well as the insured persons. As a condition precedent to availing coverage, notifying the insurer of any (i) claim made against the company/ insured person; or (ii) circumstances reasonably expected to give rise to a claim, is required.
Practical nuances associated with D&O Policy claims
Every policy is governed by policy wordings ultimately negotiated between an insurer and the company. Unlike retail policies, with standard wordings, D&O Policies, with the help of intermediaries, may often include exceptions and coverage exclusions based on negotiated positions. Prior to obtaining a policy, the company is required to fill out a proposal form, disclosing any material facts in the knowledge of the company.[1] In view of this, there are various nuances that an insured person under a D&O Policy should be aware of:
Knowledge of a company does not mean knowledge of every personnel of the company and knowledge of an insured person does not preclude claim by other insured persons
The company’s knowledge of a particular fact is critical at the time of filling the proposal form and later, during the evaluation of a claim or circumstances notification under the D&O Policy, or when a formal claim is lodged with the insurer. However, in any given company, it may not be feasible for one insured person to possess identical knowledge as another, as the information flow necessarily differs, according to their respective roles and responsibilities.
D&O Policies usually contain severability clauses providing guidance in this regard. For Side A or Side B claims, any knowledge possessed by one insured person would not be imputed on any other insured person. Therefore, knowledge of an insured person can only affect the portion of the claim attributable to such insured person. In Side C claims, only knowledge of chief executive officers/ chief financial officers (or equivalent) would constitute knowledge of the company, thereby affecting such Side C claims by companies. However, knowledge of a company in no event precludes a Side A or Side B claim.
As far as claim notifications or circumstances notification to the insurer is concerned, the awareness of the company’s risk manager or general counsel (or equivalent position) becomes relevant.
A past director/ officer is also eligible for coverage
Coverage does not lapse simply because someone is no longer employed by a company. A person who has retired, resigned or has been removed from the company may also be entitled to coverage, as long as such person was an ‘insured person’ during the subsistence of D&O Policy.
Fraud by an insured person (such as a director or a chief executive officer) does not automatically preclude coverage of persons not at fault
D&O Policies generally contain fraud exclusion clauses, whereby an insurer is not liable for any loss involving commission of a dishonest or fraudulent action (established by a competent authority). However, the policy may continue to apply to insured persons against whom no fraud has been established. For example, in the Satyam Scam, after the then-Chairman confessed to an accounting fraud, the Telangana High Court[2] appointed an arbitrator to adjudicate a former senior vice president’s claim, indicating that no automatic exclusion arises for insured persons not at fault.
Reliance can also be placed on the common law “innocent insured doctrine”, according to which an innocent insured should not be denied insurance coverage due to the fraudulent or reckless acts of another co-insured. While the doctrine would not protect against falsehood at the application stage of a D&O Policy itself, it may afford protection to the innocent insured against fraud by another insured person during the subsistence of the D&O Policy.[3]
Misrepresentation at the time of entering into a D&O Policy may be fatal
In the event of misrepresentation or non-disclosure of a material fact by the company at the time of submitting the proposal form for the D&O Policy, the insurer can repudiate any claim made under such Policy. The Supreme Court has observed that any fact, which has the potential to influence the mind of an insurer in assessing risk is a “material fact”, and a prospective insured is obligated to disclose such facts while answering questions in a proposal form.[4] Failure to do so entitles the insurer to repudiate liability on account of the clear presumption that any information sought in the proposal form is material for entering into a contract of insurance. Therefore, given that an insurance contract is a contract of utmost good faith, a company is under a solemn obligation to make a true and complete disclosure of information within its knowledge.
Ensuring adequate protection through policy verification
It is imperative that every insured or prospective insured carefully assesses the policy wordings, and verifies whether the following is present in their D&O Policy:
- a severability clause expressly enumerating that knowledge of one insured person shall not be imputed to the other;
- the definition of ‘insured person’ extending to past officers; and
- a clearly laid out claims’ notification procedure, including the timeline for notification of any claim/ circumstances and the information to be submitted in support of such claim/ circumstance.
Once the D&O Policy is in force, it is recommended to keep the insurer adequately notified of all claims lodged with the company and all events that are expected to give rise to a claim in the future.
Furthermore, the Insurance Regulatory and Development Authority of India (Protection of Policyholders’ Interests, Operations and Allied Matters of Insurers) Regulations, 2024 (“PPHI Regulations”), obligates insurers to provide fair treatment at the time of claim processing, and to avoid calling for any documentation in a piecemeal manner, thereby guarding the interests of the company.[5]
Concluding thoughts
In essence, a D&O Policy shields leadership from personal exposure while protecting the company’s balance sheet. For senior level management, this is not just risk mitigation; it is a strategic imperative. In an era of heightened regulatory scrutiny and escalating litigation costs, robust coverage ensures a person can lead decisively without fear of personal liability. Strengthening one’s D&O Policy today is an investment in stability, reputation, and confidence — cornerstones of sustainable leadership.
[1] Regulation 10(1), PPHI Regulations.
[2] V.S. Prabhakara Gupta v. Tata AIG General Insurance Co. Limited and Ors.,Arbitration Application No. 122 of 2016.
[3] Illinois State Bar Assn. Mutual Ins. Co. v. Law Office of Tuzzolino and Terpinas,27 N.E. 3d 67 (III. 2015).
[4] Satwant Kumar Sandhu v. New India Assurance Company Limited, (2009) 8 SCC 316.
[5] Regulation 23, PPHI Regulations.