The word ‘Director’ creates an image of someone who is the guiding light and the force behind all the action in an organisation. However, too much expectation overly burdens the shoulders of the directors, which, in turn, gives rise to involuntary personal risks. Often these risks are beyond the control of the directors themselves. As the directors are held accountable for every move, they often get judged for such uncontrollable factors.
Listed below are some of the risks that may fall upon Directors:
- Breach of fiduciary duty resulting in monetary losses or bankruptcy
A fiduciary duty is a legal obligation of one party to act in the best interest of another. The obligated party is usually the one entrusted with the care of money and property. They are responsible for maintaining a high standard of honesty and transparency regarding the client. The fiduciary party must not obtain any personal benefit at the expense of the client.
- Misinterpretation of company assets
This division includes miscalculation of assets, non-recording of assets, recording of fictitious assets, wrong revaluation of assets, recording of assets at false values, wrong method of depreciation calculation. The Company’s Act 2013 lays down strict rules and regulations for the way any business has to conduct itself.
Clients and Investors can litigate i.e. sue in cases such as those mentioned above in the civil courts.
- Misuse of company funds
Financial decisions and allocation of funds are usually dependent upon the directors, which can put them into a position of taking direct blame if anything goes wrong. However things may have gone wrong unknowingly.
Directors hold the capacity to make or break an organization. Hence it is necessary to back them with proper support by regularly conducting formal reviews for risk management. These should include reviews of risk oversight policies and procedures at the employer and specific committees should assess risk at regular intervals. Detection of threats is essential as a lot is at stake if risk or other procedural management is weak.
The trick to being successful is to help the organisation to grow while not exposing it to unnecessary risks. The impact of poor management can be massive and can affect all classes of the workforce. Today’s economy demands intensive risk management skills and has increased the importance of the Director’s and Officer’s Insurance.
Director’s & Officer’s (D&O) Insurance is a Key Factor
D&O insurance secures the assets of corporate directors and officers, and their spouses, in the event they are sued personally by employees, vendors, competitors, investors, customers, or other parties, for actual or alleged wrongful acts in managing a company.
It is required to cover for the following situations, events and risks faced:
1. Vulnerability to shareholder/stakeholder claims
2. Harassment allegations
3. Regulatory investigations
4. Accounting irregularities
5. Exposures relating to mergers and acquisitions
6. Corporate Governance requirements
7. Compliance with various legal statutes
Make the Right Choice
“The choice of the right insurer of the D&O policy is important. It needs to be made along with the right criteria, such as financial stability, underwriting expertise, claims management capabilities and international reach.”— Dr Alexander Mahnke
The D&O Insurance covers for all the legal expenses of the claims. Specifically, it provides reimbursement to the business leaders on allegations of wrongful or financial mismanagement. Such lawsuits filed are usually quite expensive. That is why it is advisable to protect the directors with the right policy.
Purchasing D&O insurance allows business owners to show their critical decision-makers that their risks are being taken seriously, and they will get protection against all claims. Given the fact that lawsuits from investors and competitors are particularly common for organisations, D&O insurance is a protective measure to ensure that crucial individuals are protected regardless of where the claims have originated from, thus providing timely and adequate coverage.