Why D&O liability insurance matters in 2026
Here is the reality that most founders, CFOs, and HR leaders in Indian startups and SMEs have not fully absorbed: when a director or officer is sued, the company's general liability policy does not protect them. Their personal assets, bank accounts, property, and investments, are directly on the line.
Under Section 166 of the Companies Act, 2013, directors in India are required to act in good faith in the best interest of the company and its shareholders. Breach of this duty exposes directors to civil liability and, in cases involving fraud or misfeasance, criminal liability under Section 447. The National Company Law Tribunal has the authority to hold directors personally liable without limitation of liability under Sections 339 and 340 of the Act. Recent 2026 NCLT rulings have forced personal financial contributions of over ₹10 crore from directors in insolvency-related proceedings.
According to a PwC Corporate Governance report, India saw a 25% increase in board-level litigation between 2019 and 2023, especially in fintech, edtech, BFSI, and manufacturing sectors. SEBI enforcement actions against non-executive and independent directors have intensified, with penalties ranging from ₹10 lakh to ₹5 crore for governance failures. Employee-facing litigation, including wrongful termination and workplace discrimination claims, is rising as employees become more aware of their legal rights.
Directors and officers insurance, or D&O insurance, exists precisely to absorb these risks. It covers the legal defense costs, settlements, and regulatory fines that arise when directors and officers are sued for decisions made in their professional capacity. Without it, even a frivolous claim requires the director to fund their own defense out of personal resources, often for years, before the matter is resolved.
The problem is not that Indian companies do not know D&O insurance exists. The problem is that most companies holding a D&O policy are making one or more of the ten mistakes below, and most of them will only discover those mistakes when a claim arrives and it is far too late to fix them.
Mistake 1: Assuming general liability insurance covers directors
This is the most widespread and most dangerous misconception in corporate insurance across Indian startups and SMEs. Founders and HR teams assume that because the company holds a general liability policy, the directors and officers are covered if they are sued.
They are not.
Why D&O insurance is different
General liability insurance covers bodily injury, property damage, and third-party claims against the company as an entity. It does not cover claims made against directors and officers personally for the decisions they made in their management capacity. When a shareholder sues a founder for misrepresentation during a funding round, when a regulator initiates proceedings against a CFO for financial reporting failures, when an employee files a wrongful termination claim that names the CEO personally, none of these are general liability events. They are D&O events.
The distinction matters because in each of these scenarios, without a D&O policy in place, the individual director is personally responsible for their own legal defense, often from day one of the claim, before any liability has been established, and often for matters where they acted entirely in good faith but are named in a lawsuit regardless.
Directors and officers liability insurance is specifically architected to respond to exactly these situations. It is a separate policy, with separate coverage triggers, separate exclusions, and separate coverage limits. Assuming one can substitute for the other is the kind of mistake that costs founders their personal savings.
Mistake 2: Buying coverage only after raising funds
The second most common mistake, particularly in the startup ecosystem, is treating D&O insurance as something to think about after Series A. The logic is understandable. Pre-funding, the company has limited resources and the governance structure is informal. Post-funding, institutional investors typically require D&O coverage as a condition of the investment. So the policy gets bought at the same time the term sheet is signed.
The risk of waiting too long
The problem is that D&O claims are not constrained by your funding timeline. Claims can and do arise before a company raises institutional capital. Employee disputes involving founders, shareholder disagreements between co-founders, regulatory notices for compliance failures, vendor disputes that name directors personally, all of these are pre-funding risks that a D&O policy would respond to if it were in place.
Early-stage startups also face a specific risk that later-stage companies do not. The decisions made at the founding stage, about equity structure, employment terms, vendor commitments, and regulatory filings, are precisely the decisions most likely to be litigated later. The claim may arrive in year three, but the triggering decision was made in year one, before any policy was in place.
D&O insurance policies are claims-made policies in India, meaning coverage applies based on when the claim is made, not when the underlying act occurred. But most policies also require that the act triggering the claim occurred after the policy's retroactive date. A company that buys D&O insurance at Series A typically has a retroactive date set at the policy inception, leaving all pre-funding decisions uninsured regardless of when the claim arrives.
The right time to buy D&O insurance is when the company has directors making decisions. For most Indian startups, that is at incorporation, not at Series A.
Mistake 3: Choosing the cheapest policy instead of the right coverage
Price comparison is a reasonable starting point for most purchases. For D&O insurance, it is a dangerous one.
Price vs protection
Low-premium D&O policies almost always achieve their pricing through one or more of the following mechanisms: higher deductibles that make smaller claims effectively uninsured, narrower definitions of covered wrongful acts that exclude the most common claim categories, broader exclusions that carve out the situations most likely to generate claims, lower aggregate limits that exhaust quickly in complex multi-party litigation, and restrictive sub-limits on defense costs that leave directors personally funding the gap.
The company that buys a ₹50 lakh D&O policy at a budget premium and then faces a ₹2 crore regulatory defense may discover that their policy covers legal fees up to a sub-limit of ₹20 lakh, with a deductible of ₹10 lakh, effectively leaving ₹1.7 crore of exposure on the director personally. The policy existed. The coverage did not.
The correct approach to evaluating D&O insurance cost is not to identify the cheapest policy at a given coverage limit, but to understand what coverage you are actually getting for the premium you are paying. Two policies at the same premium can provide dramatically different protection depending on their definitions, exclusions, and sub-limit structures.
Mistake 4: Ignoring key exclusions in the policy
Every D&O insurance policy contains exclusions. The exclusions are not the fine print. They are the architecture of the policy. Ignoring them is not a paperwork oversight. It is a decision to buy coverage without understanding what you are covered for.
What D&O insurance may not cover
Common exclusions in Indian D&O policies that companies frequently overlook include:
- Fraud and dishonesty exclusions: Most D&O policies exclude claims arising from fraudulent acts or dishonest conduct by the director. The exclusion is appropriate, but its scope varies significantly between policies. Some policies apply the exclusion only after fraud is established by a final court judgment. Others apply it earlier, effectively withdrawing coverage the moment fraud is alleged, leaving the director without defense cost coverage during the litigation itself.
- Bodily injury and property damage exclusions: D&O policies are not designed to cover physical harm claims. Founders of manufacturing or construction companies sometimes assume their D&O policy will respond to claims arising from workplace accidents. It will not.
- Prior acts exclusions: Claims arising from decisions made before the policy's retroactive date are typically excluded. This is why the retroactive date matters so much and why late-buying is a structural mistake rather than just a timing one.
- Insured versus insured exclusions: Many D&O policies exclude claims made by one insured against another, meaning a claim filed by a co-founder or fellow director against another director may be excluded. In the context of founder disputes, which are among the most common litigation scenarios for early-stage Indian startups, this exclusion has real consequences.
- Regulatory penalties: Some D&O policies exclude government-imposed fines and regulatory penalties. Given the direction of SEBI and NCLT enforcement in India, a policy that does not cover regulatory proceedings is a policy with a very large gap precisely where Indian directors are most exposed in 2026.
Reading every exclusion in a D&O policy is not optional. It is the only way to know what you have actually purchased.
Mistake 5: Underestimating the required sum insured
Most companies pick a D&O sum insured based on what feels reasonable relative to the premium, rather than based on any analysis of their actual exposure. The result is policies that are adequate for routine disputes and catastrophically inadequate for serious litigation.
How much D&O coverage is enough?
The right sum insured for a D&O policy depends on several factors that vary meaningfully across companies.
- Industry and regulatory environment: Companies in fintech, BFSI, healthcare, and pharmaceuticals face significantly higher regulatory litigation risk than companies in less regulated sectors. A fintech startup with a Reserve Bank of India compliance obligation needs materially higher D&O coverage than a SaaS company with a similar employee count and revenue base.
- Funding stage and investor composition: Post-funding companies with institutional investors, formal boards, and investor-appointed directors operate under significantly higher governance scrutiny than bootstrapped companies. Securities litigation risk, shareholder derivative suits, and investor disputes all increase with the sophistication and number of investors on the cap table.
- Employee count and employment practices exposure: Employment-related claims, wrongful termination, workplace discrimination, and harassment allegations are among the most frequent sources of D&O claims globally. Companies with larger employee bases carry proportionally higher employment practices liability exposure.
As a practical benchmark, most insurance advisors working with Indian startups recommend a minimum sum insured of ₹5 crore for seed and pre-Series A companies, ₹10 to ₹25 crore for Series A and B companies, and upward of ₹25 crore for pre-IPO or listed entities. These are starting points, not universal prescriptions. The right number for your company requires an actual exposure analysis, not a benchmark lookup.
Mistake 6: Not covering independent directors and board members
Companies that buy D&O insurance for their executive directors, founders, and key management personnel but fail to extend coverage to independent directors, investor-appointed directors, and non-executive directors are creating a serious governance and retention problem.
Protecting everyone in leadership
Independent directors in India have specific fiduciary duties under the Companies Act, 2013 and SEBI's Listing Obligations and Disclosure Requirements regulations for listed companies. Their liability, while limited compared to executive directors for matters outside their knowledge, is real and growing. SEBI has demonstrated a clear willingness to initiate enforcement actions against non-executive directors for governance failures at listed companies, with penalties that reach into crores.
Investor-appointed directors carry the additional complexity of potentially being seen as representing a specific shareholder's interests, which creates litigation exposure in situations where their position conflicts with the interests of other shareholders or creditors.
Non-executive directors who are not covered under the company's D&O policy may be personally funding their own legal defense in any dispute where they are named, because the company's indemnification obligation may not be backed by the liquidity to actually pay it in a financial stress scenario. Side A coverage under a D&O policy, discussed in detail below, exists precisely to protect individual directors when the company cannot or will not indemnify them.
A D&O policy that does not cover your full board is not a board-level protection policy. It is a selective protection policy that creates exactly the governance gaps it was supposed to eliminate.
Mistake 7: Failing to review policy wording annually
D&O insurance is not a set-and-forget purchase. It is a policy that needs to be reviewed against your company's current risk profile every year, because your company's risk profile changes every year.
Business risks change over time
A startup at seed stage has a different risk profile from the same company at Series B. The risks associated with a 15-person team are different from the risks associated with a 150-person team. The regulatory exposure of a company that was purely B2B SaaS is different once that company launches a lending product, a payments product, or enters a regulated vertical.
Policy language also changes at renewal. Insurers adjust terms, exclusions, and coverage definitions based on their claims experience across their portfolio. A term that was broadly defined in your previous policy may be narrowly defined in the renewed version, creating a coverage gap that did not exist before. HR and leadership teams that do not read the renewal policy against the previous year's policy will not catch these changes until a claim surfaces.
Company events that should trigger a mandatory D&O policy review include raising a new funding round, adding new directors or board members, entering a new regulated industry or geography, launching a new product category, undergoing a significant restructuring, or facing any regulatory inquiry or notice regardless of severity.
Mistake 8: Overlooking employment practices liability risks
If someone asked most founders and HR leaders which type of claim is most likely to name them personally, the answer would probably be investor disputes, regulatory actions, or financial fraud allegations. The correct answer, globally and increasingly in India, is employment-related claims.
One of the most common sources of claims
Wrongful termination claims, workplace discrimination allegations, sexual harassment complaints, and retaliation claims are among the most frequent sources of directors and officers liability insurance claims across both mature and emerging markets. In India, the Sexual Harassment of Women at Workplace Act, 2013 creates specific compliance obligations and liability exposure for company leadership. Failure to constitute an Internal Complaints Committee, failure to follow the prescribed complaints process, and failure to take appropriate action all create personal liability for the responsible senior leadership.
Employment claims are particularly dangerous from a D&O perspective because they typically name both the company and specific individuals, including the HR head, the reporting manager, and the CEO or founder, creating simultaneous entity and individual liability. Standard D&O policies may not respond adequately to employment claims unless the policy specifically includes Employment Practices Liability (EPL) coverage.
EPL coverage needs to be explicitly verified as part of the D&O policy, not assumed. Many companies carry D&O insurance that excludes employment claims or covers them only under a sub-limit that is inadequate for extended litigation. Given that employment litigation in India is becoming more sophisticated and more common, this is the coverage gap most likely to be painfully discovered under time pressure.
Mistake 9: Not understanding Side A, Side B, and Side C coverage
This is the most technically complex mistake on this list, and the one most likely to be glossed over in a policy conversation. Side A, Side B, and Side C are not just insurance jargon. They are the structural architecture of a D&O policy, and not understanding which side applies in which situation leads to false confidence about coverage that does not exist when a specific claim arrives.
The most confusing part of D&O insurance
Side A coverage: protection for individual directors when the company cannot or will not indemnify.
Side A is the most critical coverage for individual directors and officers. It responds when the company is legally or financially unable to indemnify the director for a covered claim. This includes situations where the company is in insolvency proceedings and cannot pay, where indemnification is prohibited by law for the specific claim type, or where the company's board has determined that indemnification is not appropriate.
In insolvency scenarios, which are exactly the situations where directors face the highest personal liability, the company's indemnification commitment is worth nothing because the company has no money. Side A is the only coverage that protects the individual director in this scenario. A D&O policy without adequate Side A limits is inadequate precisely when the personal stakes are highest.
Side B coverage: reimbursement to the company for indemnifying directors.
Side B responds when the company does choose to indemnify its directors and officers for covered claims. The company pays the defense costs and settlements from its own resources and the insurer reimburses the company. Side B protects the company's balance sheet from the cost of fulfilling its indemnification obligations.
Side C coverage: entity protection for securities claims.
Side C, also called entity coverage, protects the company itself against securities law claims, primarily shareholder suits and investor claims alleging misrepresentation or fraud in connection with securities offerings. For listed companies, pre-IPO companies, and companies with institutional investors, Side C is relevant. For early-stage startups, it may be less critical, but it becomes essential as the company approaches a capital markets event.
Understanding which side of coverage applies to which scenario is the foundation of knowing whether your D&O policy will actually respond when you need it to. A company that buys D&O insurance without understanding this structure may discover, when a claim arrives, that the side of coverage that applies to their specific situation has inadequate limits or does not exist in their policy at all.
Mistake 10: Not working with an experienced insurance advisor
D&O insurance is not a commodity product. It is a specialty liability policy where the terms, definitions, exclusions, and sub-limit structures vary significantly between insurers and require expert interpretation to evaluate meaningfully.
Why expert guidance matters
The Indian D&O insurance market has grown significantly as startup governance has matured, but the market remains complex and the quality of available products varies. Advisors without specific D&O expertise will default to price comparison rather than coverage comparison, which produces the outcome described in Mistake 3. They will present two policies at different premium points and let the buyer choose based on cost, without explaining that the cheaper policy excludes regulatory proceedings, has a narrower retroactive date, or applies its EPL coverage under a separate sub-limit that is inadequate for extended litigation.
An experienced D&O insurance advisor brings three capabilities that directly affect your coverage outcome. They negotiate policy terms with insurers to broaden definitions, eliminate or narrow problematic exclusions, and structure retroactive date coverage appropriately for your company's history. They compare policies across substantive coverage terms rather than just premiums, giving your leadership team a meaningful basis for choosing between options. And when a claim arrives, they provide claims support that is material to outcomes. Insurer interpretations of policy language in a claims context are not always favorable to the insured, and an advisor who understands the policy wording and has a relationship with the insurer's claims team meaningfully improves the probability of a favorable resolution.
The cost of working with an experienced D&O insurance advisor is a fraction of the legal defense cost of a single claim. The gap between buying the right policy with expert guidance and buying an inadequate policy without it is a gap that does not become visible until the claim arrives, and by then it is too late to fix.
How to choose the right D&O insurance policy
Getting D&O insurance right is not complicated once you know what to look for. Here is the framework:
- Start with your actual exposure, not a benchmark: Your industry, regulatory environment, funding stage, board composition, and employee count all affect what coverage you need. Buying a policy without an exposure analysis is buying a policy blind.
- Read the exclusions before the premium: The exclusions define what you are not covered for. The premium tells you the price of that coverage. Reading the premium without the exclusions is like agreeing to a price without knowing what you are buying.
- Verify Side A limits separately: Side A coverage for individual directors when the company cannot indemnify is the most important coverage in a D&O policy. Confirm that Side A has adequate standalone limits and that those limits are not shared with Side B in a way that could exhaust Side A coverage through entity-level claims.
- Confirm EPL coverage explicitly: Do not assume that employment practices liability is included in your D&O policy. Ask specifically, get the answer in writing as part of the policy schedule, and verify the sub-limit is adequate for your employee count and jurisdiction.
- Set the retroactive date at incorporation: The retroactive date determines how far back in time your policy will respond. Setting it at the policy inception date rather than at incorporation leaves all pre-policy decisions uninsured.
- Review annually, not just at renewal: Your risk profile changes with your company. Your policy should be reviewed every time a significant business event occurs, not just when the renewal notice arrives.
D&O insurance is one of the most complex corporate insurance products in the Indian market, and one of the most consequential to get wrong. Pazcare works with startups and SMEs across India to evaluate D&O coverage options, identify gaps in existing policies, and structure the right protection for every member of your leadership team.
Talk to a Pazcare insurance expert to compare the best D&O insurance plans for your company and ensure your directors and officers are covered for the risks they actually face in 2026.
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