In recent years, many organizations have applied directors liability insurance. What gives this type of insurance? What damage can be compensated for? What kind of obligations can an enterprise that has entered into such an agreement have? We will talk about this in our article.
Head Responsibility
During daily activities, the director has to make various managerial decisions aimed at improving the quality of work of employees or the further prosperity of the company. But these decisions do not always turn out to be favorable, sometimes they do not lead to the consequences that the manager expected, and often not to those.
It also happens that some actions by the director damage not only the company, but also third parties. In these and many other cases, official liability insurance is required. According to the legislation of the Russian Federation, the director bears all the burden of responsibility in case of loss.
What is a loss?
According to the Civil Code of the Russian Federation, loss refers to expenses incurred or incurred by a citizen whose rights have been violated in restoring damage to property. In addition, this includes the non-receipt of income that a citizen could receive under ordinary conditions, if his rights were not violated. Losses also include damage suffered by the company itself, shareholders, founders, government bodies and other interested parties. This kind of liability is provided for by the legislation of the Russian Federation.
Law on Rights and Responsibilities
The Civil Code states that the company acquires civil rights and assumes obligations through its bodies, which must act in accordance with the law, other legal acts and constituent documents. A citizen acting on behalf of an enterprise or organization legally must act to ensure its interests in a conscientious and reasonable manner. At the same time, this citizen is obliged, according to the requirements of the founders (unless another model of behavior is fixed by law or contract), to fully compensate for the damage caused to the organization.
Responsibility in such cases is provided for in the Labor Code of the Russian Federation. It says that the head of a legal entity bears full financial responsibility for losses caused to the organization. In addition, the director must compensate the company for losses that were caused by his guilty actions, in cases specified by law.
Board of Directors
Also, not only directors, but top managers or deputies are jointly and severally liable, and a mistake on the part of each of them can have financial and other consequences for the rest. In these cases, we are talking about liability insurance of the board of directors, or rather its members. Proceedings against the company and its management team often involve a high degree of personal responsibility of the participants. If we are talking about a joint-stock company, then there is a certain periodicity of the meeting of the Board of Directors. Explanatory note on liability insurance. It is a necessary document on the agenda of the annual general meeting.
The procedure and rules of liability insurance
Liability for damages arising from incorrect decisions arises for the head only when the victims file a lawsuit in court. Most often, claims are brought by shareholders, employees, including former, creditors, business partners, competitors and third parties, as well as state regulatory authorities.
To protect the manager and reimburse the expenses that he will incur in satisfying the claims, the organization may conclude a director liability insurance contract. It belongs to a comprehensive type of insurance. Under such agreements, not only damage is paid to the injured party, but also the financial costs of a lawyer and the protection of the rights of the head in the judiciary.
Directors' liability insurance is voluntary. In this case, a contract is concluded in simple written form between the insurance company and the company that will be the policyholder. The insurance premium under this contract is carried out by the organization. This procedure is regulated by articles of the Civil Code of the Russian Federation. In accordance with it, the contract clearly indicates the person whose liability will be insured. In the event that the insured person is not registered in the document, the liability of the insured will be considered insured.
An important fact
An important feature of such an agreement can be considered that in this case it is always in favor of the citizens who suffered the damage, regardless of whose liability was insured. Situations such as making mistakes in management decisions that happen once are subject to insurance. Employer liability insurance is also required in the case below. For example, if the director as a whole copes with his duties, but accidentally admits the commission of any erroneous actions that lead to losses.
Liability insurance policy
In this case, the director’s liability insurance policy will be issued to the organization. Specialists of insurance companies calculate the possible risks for each company individually. Therefore, for this procedure there are no uniform fixed tariffs. The size of the premium rate is determined taking into account the characteristics of the insurance object and the characteristics of possible risks. The amount of the insurance tariff is determined by agreement of the parties.
What affects payouts?
The amount of insurance benefits is affected by many factors:
- specific business features;
- the duration of the organization’s business on the market;
- value of assets;
- the presence or absence of debt obligations;
- publicity of the company;
- profile and geography of activity;
- reputation of specific leading employees (top managers);
- corporate history;
- management level;
- financial and personnel stability of the organization;
- composition of shareholders;
- value of the securities of the company;
- the presence of lawsuits against the company, etc.
Directors liability insurance contracts are used as a comprehensive protection mechanism for company owners (or other persons specified in the agreement).
Insured event and insurance claims
An insured event is an event, the occurrence of which entails the payment by the insurer of the policyholder, the insured or other citizens and enterprises. Such events include: damage to third parties that occurred as a result of a mistake made by the director of the company during the exercise of his official powers.
These errors are:
- violation of the provisions relating to the authority of the head;
- lack of diligence during management decisions;
- unintentional misconduct;
- short-sighted management and lack of control over the activities of workers;
- lack of awareness and random indication of incorrect information;
- purchase of unprofitable assets;
- use of unverified information;
- disruption of a major transaction;
- accidental violation of antitrust provisions;
- the presence of labor disputes;
- committing actions that are contrary to the articles of the Criminal and Tax Codes, as well as the Code of Administrative Offenses.
It should be remembered that events that are insured events will be considered to have occurred only in the event of a lawsuit.
The size and nature of insurance payments are usually set by the liability insurance contract. The amount indicated therein is paid to the policyholder, insured persons or beneficiaries upon the occurrence of the insured event. The grounds in this case are not important, with the exception of those situations that cannot be considered an insurance accident by law.
They can be:
- the presence of claims that have occurred the conclusion of a liability insurance contract;
- nomination of claims by the plaintiff related to environmental damage;
- manager receiving a bribe;
- physical destruction of property and damage to third parties that was not done during working hours;
- claims between managers within the same company (if directors are insured);
- bringing the head to any kind of liability under the law;
- violation by the head of someone else's copyright, etc.
The law sets a limitation period of 3 years. The expiration of the limitation period begins from the moment when the citizen found out that his rights were violated. Damage is compensated within the amounts established by the contract.
As a rule, such a document provides for covering expenses for three types of losses incurred:
- expenses reimbursing losses caused to the organization or other persons, by decision of the judiciary;
- costs related to legal costs;
- the expenses of the insured if a criminal offense is brought against him, if he is not found guilty.
Finally
In general, using the Director General's liability insurance agreement, it is possible not only to compensate for losses incurred by other persons due to incorrect actions by the manager, but also to reimburse the insured persons for legal costs and legal services if necessary.