D&O Insurance Adjustment.
D&O Insurance Adjustment
1. Meaning of D&O Insurance Adjustment
D&O Insurance Adjustment refers to the review, modification, and enhancement of Directors and Officers liability insurance to ensure adequate protection for directors and senior management against personal liability arising from their official actions.
Adjustments may include:
Increasing policy limits
Expanding coverage scope
Reducing exclusions
Extending run-off or tail coverage
Aligning insurance with evolving regulatory and insolvency risks
D&O insurance must be dynamic, not static.
2. Importance in Corporate Governance
D&O insurance adjustment is a vital governance mechanism because:
Directors face increasing regulatory scrutiny
Personal liability risks rise during financial distress
Qualified professionals may refuse board positions without adequate coverage
It encourages independent decision-making without fear of personal ruin
Failure to adjust D&O coverage may be viewed as poor governance oversight.
3. Board’s Duties Regarding D&O Insurance
The Board is expected to:
Periodically review D&O policy adequacy
Ensure coverage matches the company’s risk profile
Assess exclusions relating to fraud, insolvency, and regulatory penalties
Approve adjustments during restructuring, mergers, or distress
A failure to adjust coverage when risks escalate may amount to breach of duty of care.
4. D&O Insurance During Insolvency and Distress
In insolvency scenarios:
Claims against directors increase (wrongful trading, misfeasance)
Company indemnities may become ineffective
D&O insurance becomes the primary protection for directors
Adjusting D&O coverage before insolvency—such as adding run-off cover—is considered prudent governance.
5. Consequences of Inadequate D&O Insurance Adjustment
If D&O insurance is not properly adjusted:
Directors may face uninsured personal liability
Defence costs may not be reimbursed
Claims may be denied due to exclusions
Creditors may challenge board decisions more aggressively
Courts emphasize that D&O insurance does not protect fraud but must reasonably cover negligence and breach of duty claims.
Important Case Laws (Without External Links)
1. Official Liquidator v. P.A. Tendolkar
Principle:
Directors are personally liable for negligence and breach of duty.
Relevance:
Highlights the need for adequate D&O coverage to protect against negligence claims.
2. N. Narayanan v. Adjudicating Officer, SEBI
Principle:
Directors can face personal liability for regulatory violations.
Relevance:
Justifies periodic adjustment of D&O insurance to cover regulatory defence costs.
3. Oriental Insurance Co. Ltd. v. Sony Cheriyan
Principle:
Insurance coverage is strictly governed by policy terms.
Relevance:
Emphasizes careful adjustment of D&O policies to avoid exclusions.
4. General Assurance Society Ltd. v. Chandmull Jain
Principle:
Insurance contracts must be interpreted as written.
Relevance:
Boards must review and adjust D&O policy terms proactively.
5. Jet Airways (India) Ltd. Insolvency Case
Principle:
Directors face heightened exposure during insolvency.
Relevance:
Failure to maintain or adjust D&O insurance increased personal risk to directors.
6. Satyam Computer Services Ltd. Case
Principle:
Governance failures expose directors to civil and regulatory claims.
Relevance:
Demonstrates the importance of adequate D&O insurance adjustments.
7. Clariant International Ltd. v. SEBI
Principle:
Disclosure failures attract director-level liability.
Relevance:
Supports expanding D&O coverage to include disclosure-related defence costs.
Key Takeaways
D&O insurance adjustment is a continuous governance responsibility
Coverage must evolve with regulatory, financial, and insolvency risks
Courts enforce policy terms strictly—no assumed coverage
Adequate D&O insurance encourages independent and prudent board decisions
Failure to adjust coverage may expose directors to personal liability
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