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How do Directors cover their legal liability?

How do Directors cover their legal liability?

The Personal Data Protection (PDP) Bill, which was introduced in 2019, aims at bringing data protection laws in India at par with those in the EU. One of the ways it does this is by holding a company and its executive directors, managers and other officials accountable for data violations.

This means the directors and officers of a social media, internet or electronics hardware company will face legal and criminal proceedings in the event of data breaches where they were willfully complicit or negligent.

What’s more, in November 2021, a parliamentary panel which was held on this bill, broadened the scope of the officials who will face action to also include independent and non-executive directors. These directors do not have any monetary relationship with the company but assist in providing guidance and improving corporate credibility.

But, is there a way directors and other officials can cover their legal liability during data violations?

Many companies opt for Directors and Officers (D&O) Liability Insurance to protect their executives from such perils. This kind of a policy covers claims of willful misconduct or negligence committed by the top management of a company, including independent directors and other board members.

D&O Insurance also covers the legal costs associated with defending a civil or criminal lawsuit against a director or officer. It has become a key insurance policy for almost every startup or corporation. In fact, most independent or non-executive directors demand such a policy before deciding to join a company.

However, Directors and Officers Insurance does NOT provide cover for instances where it has been proven that a deliberately criminal or fraudulent act/omission or willful violation of a statute has occurred.

Thus, in the event of a data breach, such a policy will only be applicable if a director or officer has successfully proven their innocence.

Read about how GoDaddy witnessed a large data breach and how businesses cover their losses in such instances

Further Reading

Learn more: What does D&O Insurance cover?