Section 58 of the Disaster Management Act, 2005 and its impact under a D&O cover
Considering the Coronavirus pandemic situation, the Ministry of Home Affairs vide an Order dated 24th March, 2020 issued certain guidelines to be followed by various sectors and industries. In order to ensure stricter implementation of containment measures, the Disaster Management Act, 2005 was invoked. Amongst the other sections under “offences and Penalties”, the Act covers offences committed by a company under section 58. This newsflash analyzes Section 58 of the Disaster Management Act, 2005 and its impact on a Director and Officers insurance cover.
Section 58 deals with Offences committed by a company or body corporate. The said section holds every person who is in-charge of the company and responsible for the conduct of the business of the company liable for the offence committed by the Company under the said Act. In the event it is proved that the offence committed by the company was committed with the consent of or in connivance with or attributable to any neglect on the part of any director, manager, secretary or other officer of the company, then such officers shall be deemed to be guilty of that offence and be punished accordingly.
However, if such Officer establishes that the offence was committed without his knowledge or he exercised due diligence to prevent the commission of the offence, then such officer shall not be liable to be punished under the said section.
In such a scenario, what would be the impact of a directors and officers insurance cover. D&O policies provide coverage to Directors and Officers from any Claim that may arise from a decision taken by them in their capacity as a director or officer of the company. For example, in the present situation of COVID- 19, a civil suit may be initiated against the company for breach of contract with its major customers and the directors and officers of the company may also be made a party to the suit on the pretext of their designation in the company.
Firstly, for the Policy to get triggered, one needs to first determine whether such allegation against a director or officer falls within the ambit of the term ‘Wrongful Act’ under the Policy. Secondly, one also needs to determine whether the amount sought to be indemnified by the Insurer falls within the ambit of the term “Loss”, since most of the D&O covers exclude ‘fines and penalties imposed by law’ and ‘damages that are uninsurable under the law’ within its ambit. We have come across various D&O insurance covers wherein civil fines and penalties are included within the definition of the term ‘Loss’. Therefore, if the amount sought to be indemnified includes fines imposed by law, then one will have to consider this aspect on case to case basis and also ascertain that such fines imposed by law qualifies as a civil fine that is insurable under law.
It would be prudent to mention here that most D&O policies may not cover ‘Loss’ arising out of a Claim made against the directors and officers for “bodily injury, sickness, disease or death of any person. However, the said exclusion may not trigger if it is established that suit initiated against the directors and officers for failure to comply with the contract on account of the pandemic does not constitute a claim “for” bodily injury.
Nonetheless, some of the D&O policies clarifies that suchexclusion for bodily injury does not apply to a ‘Securities Claim’ or mental or emotional distress in connection with an ‘Employment Claim’.
Therefore, in order to determine whether any claim against a director and officer relating to the decisions arising from COVID 19 is covered under the policy, one will have to consider the above mentioned aspects, however, since the terms of a D&O policy usually differ from company to company, therefore, the specific terms and conditions of the policy need to be considered to understand the scope of cover available.
