Common Exclusions in D&O Insurance
An exclusion refers to policy provisions that limit the scope of coverage. These exclude specific risks and clearly state what the insurance agreement intends to cover. Most policies come with extensive coverage and exclusions are induced by the insurer to protect the sanctity of the insurance and also manage their risks. In some cases, these policies have "carve-back" too - an exception to common exclusions in D&O insurance.
Exclusions can vary from one insurer to another, but here are some common exclusions in D&O insurance you are most likely to find:
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Dishonest Acts
Directors and officers are required to act in accordance with all the laws, statutes, and regulations prevalent in their industry. With every organisation expecting those in managerial positions to uphold it, any individual failing to stand up to them because of dishonesty can lose their D&O insurance coverage.
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Fines and Penalties
Fines and penalties can be levied on individuals when they breach a contract, break government regulations, or conduct acts that do not meet local laws. Since these are most likely induced by bad behaviour, most D&O insurance policies do not cover them as they would negate the meaning of the charge.
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Insured vs Insured
A director can sue other director/s of the same organisation. In such cases, the directors and officers will bear the legal expenses from their pocket as the Insured vs Insured exclusion kicks in, making D&O insurance invalid.
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Bodily Injury/Property Damage
Physical injury is covered under mediclaim insurance and directors and officers insurance does not cover any bodily injury caused to anyone in the managerial position. Also, properties like cars are covered under specific policies and are out of D&O insurance coverage.
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Prior and Pending Litigations
Directors' and officers' liability insurance only covers claims filed during the policy's tenure as it is written as claims-made. Any prior and pending litigations and losses the organisation reports beyond its tenure are excluded.
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Proprietary Information, Trade Secrets, and Intellectual Property
Intentional fraud (such as sharing sensitive organisational information) can be considered a criminal act. So, these are debatable and excluded from the D&O insurance periphery.
Example of Failed D&O Insurance Claim
If you are still unsure of the common exclusions in D&O insurance and how they work, here is a hypothetical scenario to explain it better:
Trading Trust for Treachery: D&O Claim Denied in Insider Trading Debacle
Executives of an Indian firm exploited their privileged positions by engaging in insider trading. Armed with confidential information, they execute lucrative stock trades, pocketing substantial gains. As suspicions arise, SEBI investigates, uncovering a web of deceit orchestrated by the high-ranking officers. It fined three of the directors with hefty fines.
The directors panicked and raised a Directors and Officers (D&O) insurance claim to settle the dues. However, the insurer discovered an intentional breach of trust during the investigation. The executives' insider trading violated securities laws and betrayed the essence of corporate governance.
Therefore, the D&O insurance claim was denied, as the policy explicitly excludes coverage for intentional misconduct. The executives' betrayal of trust proves a bridge too far for the insurance to cover.
Conclusion
A D&O insurance is not a sure shot to gain indemnity for directors and officers in managerial positions. Most directors' and officers' insurance policies come with a set of exclusions that narrow down their scope, and those in managerial positions must be wary of them. If your leaders are well within the boundary, a D&O policy can safeguard their finances and stature, and most businesses offer it to their top-level executives. If your organisation is also looking to get directors' and officers' insurance, head over to Policybazaar for Business and find the top policies from the best providers across the country in a single place.
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