Modern Liability Covers

In one line

New statutes created new personal liabilities for directors, for data handlers and for advisers, and the market answered each with a policy.

In the wording a student can write in an exam: the modern liability covers are the policies developed to answer liabilities that older law did not create, principally the directors and officers liability policy, which answers the personal liability of a director under the Companies Act, 2013, and the securities law; the cyber liability policy, which answers loss and liability from a data breach, now underpinned by the Digital Personal Data Protection Act, 2023; and the errors and omissions, employment practices and crime policies, each of which exists because a specific exposure has outgrown the general liability wording.

Directors and officers liability

Why it exists. Indian company law made the director personally answerable. Section 166 of the Companies Act, 2013, states his statutory duties; section 149(12) limits an independent director's liability to acts of which he had knowledge, consent or connivance or where he failed to act diligently, and by implication confirms that other directors are fully exposed; section 447 makes fraud an offence with heavy consequences; and the securities legislation and the Insolvency and Bankruptcy Code, 2016, add their own personal liabilities.

And the Act contemplates the insurance. Section 197(13) provides that where a company takes insurance on behalf of its managing director, whole time director, manager, chief executive officer, chief financial officer or company secretary for indemnifying them against liability for negligence, default, misfeasance, breach of duty or breach of trust, the premium is not treated as part of their remuneration; but if a person is proved to be guilty, the premium paid for him shall be so treated.

What the policy covers. It has three limbs. Side A indemnifies the individual director or officer where the company cannot indemnify him. Side B reimburses the company where it has lawfully indemnified him. Side C, in a listed company, covers the company itself for securities claims.

Its exclusions. Deliberate dishonesty and fraud, ordinarily only once finally adjudicated, so that defence costs are advanced until then; personal profit to which the insured was not legally entitled; fines and penalties; bodily injury and property damage, which belong to the general liability policy; and claims by one insured against another, subject to carve outs.

It is written on a claims made basis with a retroactive date, and a retiring director needs run off, because a claim will often arrive years after he leaves.

Cyber liability

Why it exists. The Information Technology Act, 2000, made a body corporate handling sensitive personal data liable to pay damages by way of compensation for negligence in implementing reasonable security practices, under section 43A, and created offences of dishonest computer misuse under sections 43 and 66.