The insurance policy every entrepreneur should have to navigate a legal crisis

How the D&O policy works

All D&O policies have limits up to which specific costs will be covered. This is called limit of indemnity or limit of liability. “It should ideally be 10-25% of the total net worth of the company, as a thumb rule,” said Mudassir Khalil, head of reinsurance, surety, liability at Digit Insurance.

A company can opt for higher coverage. 

“The ideal limit of liability is subjective. An adviser may recommend a sum assured based on past claim trends linked to the industry and the size of the company,” said Abhishek Bondia, principal officer and managing director at SecureNow Insurance Broker. “Insurers are comfortable issuing a wide range of overall sum assured limits, but are more careful about defining the deductibles and sub-limits in the policy.”

Deductible, called retention in D&O liability insurance, is the amount a company bears before the policy coverage kicks in. For example, if your company has a ₹5 crore D&O insurance with ₹5 lakh deductible, the company or the directors and officers involved will bear up to ₹5 lakh of the legal costs before the insurance company pays for it.

There are also two types of policy limits: per claim limit, and aggregate limit.

If the overall limit of liability is ₹5 crore, the per claim limit could be restricted to ₹1-2 crore. 

Aggregate limit is the total amount the insurer will pay for all claims combined during the policy period. If the aggregate limit is ₹5 crore, and multiple claims are going on, the insurer will only pay up to ₹5 crore in a year.

What if a legacy lawsuit emerges? The coverage will depend on the retroactive date—the policy inception date when you paid your first premium, So all disputes linked to existing or old D&Os will be covered since you first bought the policy, provided it’s still in effect. 

The premium

Premium typically begins from ₹7,000 for a liability limit of ₹70 lakh, said Tejas Jain, founder and chief executive of BimaKavach, an insurance broking platform. A higher limit of, say, ₹5-7 crore may cost about ₹1 lakh in annual premium, depending on a company’s turnover and other factors, said Bondia of SecureNow Insurance.

“The underwriting process to determine premium will take into account the type of industry a company is in, the scale and size of the business, financial performance, and the extent of the global exposure. Claims history too affects the premium,” said Jain. 

The number of employees also matters. “The same ₹100-crore turnover company with 10 or 1,000 employees will have different premiums,” Jain added.  

Deductibles, policy limits, and add-ons also play a role in the premium amount. The higher the deductible or policy limits, the lower the premium. 

Key features you must consider 

D&O policies are not standard across insurers. What one insurer offers as an in-built feature could be offered as an add-on by another. Buyers should focus on the coverage relevant for their company instead of the number of features.

A D&O policy typically covers legal defense costs, settlements and judgments, investigation costs, court fees, and witness costs, and may charge extra for other features depending on the company and industry.

“If a chemical or a pharma company asks for pollution-related coverage, the insurer may charge for it, but it will give it free of cost to IT companies,” said Jain. “(But) employment practices liability insurance (EPLI) could be chargeable for IT and financial services or have a higher deductible.”

Entity EPLI is an important clause a company must consider. 

“A standard D&O policy will only cover directors or officers. However, companies are often named as a party in employment practices lawsuits. Entity EPLI covers the company along with D&Os for EPLI claims,” said Bondia of SecureNow Insurance. 

Another important feature to consider is the assets and liberty clause, under which an insurer prioritises funding the cost of the insured’s personal liberty from arrest or detention, freedom of movement, or seizure or freezing of personal assets. 

Special access limit for non-executive directors is another important clause. A separate limit of liability is provided for non-executive directors under this, usually in addition to the main policy limit, so they are not left unprotected in case the main D&O policy limit is exhausted. 

Things to keep in mind 

Be aware of exclusions. Fraud and dishonesty, willful misconduct/intentional wrongdoing, personal profit/illegal remuneration, bodily injury/property damage, and claims brought by one insured person against another (one director suing another), are generally excluded.

While the insurer may start covering the defence cost from when court proceedings begin, if the accused is found guilty, the insured will have to pay back the cost incurred so far to the insurer.

“The insurer will cover the cost from the beginning itself until final adjudication. So even if a lower court finds the accused guilty and the case goes on to a higher court, the insurer will keep paying the defence cost,” said Khalil of Digit Insurance. “(But) if the accused is eventually found guilty, the insurer will typically recover funds from the guilty and reinstate the equivalent value in the policy coverage.”

Bondia added that insurers look at whether a claim is payable based on initial impressions. “Unless there is a strong case of non-admissibility of the claim, the insurer pays the defence cost admissible in the policy,” he said.

That said, the claims process may not be all smooth. 

Jain of BimaKavach shared a case study.

A discrepancy in an employee’s sales records led to an internal escalation. Unfortunately, the employee was later found dead by suicide. His father filed a complaint against the company’s executives, alleging harassment.

“Initially, the insurer rejected the claim under ‘bodily injury/property damage’ exclusion. We intervened, positioning it as a mental harassment case and provided all supporting documents. After negotiation, the insurer agreed to cover ₹37 lakh of the ₹49 lakh legal defense cost,” Jain said.