Overview
Under the Companies Act, 2013, D&O liability insurance protects directors and officers of a company from personal financial losses arising from legal claims due to wrongful acts, negligence, or breach of duty during their official capacity. The Act allows companies to purchase and maintain D&O insurance to safeguard their key managerial personnel from liabilities arising out of civil, criminal, regulatory, or shareholder actions.
The Companies Act 2013 has brought in significant changes, which highlight the protection of the interests of stakeholders and other shareholders. The increased responsibilities assigned to the directors and officers heighten the chance of their being accountable for acts they commit either wrongfully or unintentionally, thereby leading to significant legal costs or other financial burdens. As a result, Directors and Officers (D&O) liability insurance has been gaining popularity. The D&O insurance is mentioned under section 197(13) under the Companies Act 2013.
Director’s and Officer’s liability insurance is a relatively new concept in the Indian Corporate scenario. It has yet to become customary.
What is Directors and Officers (D&O) Liability Insurance?
Directors & Officers (D&O) Liability Insurance is a type of insurance policy that provides financial protection to directors and officers of a company in the event that arises through wrongful acts intentionally or unintentionally in the performance of their duties. It is designed to safeguard the personal assets of directors and officers and protect them from legal expenses and potential liabilities arising from their management decisions. It is not mandatory in India unlike motor insurance but because of the compliance requirements and liability on Directors and Officers of the company.
What Does the ‘Wrongful’ Act Mean in this Act?
In the context of Company Act insurance, a wrongful act involves errors or omissions by a director or officer during their duties. It results in harm to a third party. This can include acts of negligence, breach of contract, or fraud.
Who Does the Insurance Cover Apply?
- Director, officer, secretary or a person employed in an executive capacity of the Insured Organization.
- Manager and receiver of property of the Insured Organization.
- An employee of the Insured Organization performing a managerial or supervisory role.
- Former, present or future members of the board of directors.
- The trustee or other person administering an arrangement made between the Insured organization and other persons.
Why Is D&O Liability Insurance Insurance Important for Both Public and Private Limited Companies?
#1 Board of Directors liability insurance safeguards directors and officers from personal liability when sued for alleged wrongful acts or negligence. Without this coverage, they risk personal assets.
#2 Offering D&O insurance coverage is an attractive benefit for directors and officers, which helps companies attract and retain highly qualified individuals for executive positions.
#3 Directors and officers can face substantial financial risks when lawsuits are filed against them.
The costs associated with legal defense, settlements, or judgments can be substantial and can quickly deplete personal resources. D&O insurance mitigates financial risks by covering legal expenses and potential liabilities. This enables directors and officers to concentrate on their duties without financial burden.
#4 Moreover, D&O insurance plays a crucial role in promoting good corporate governance.
#5 D&O insurance indirectly benefits shareholders and stakeholders by providing a potential source of funds to cover legal claims.
Conclusion
The D&O liability insurance is an important protection that offers legal protection arising due to their duties and responsibilities. Companies should consider this insurance cover for mitigating potential risks. To know more about what it is and how to file a claim under this insurance policy, get in touch with the SecureNow team.
FAQs
Q) What is D&O liability insurance under Companies Act 2013?
A) It is a corporate policy that protects directors and officers from liabilities due to decisions made in their managerial roles.
Q) Is D&O insurance mandatory under the Companies Act?
A) No, it’s not mandatory but is considered a good governance practice and is increasingly common among Indian companies.
Q) Who can be covered under D&O insurance?
A) Board members, directors, key executives, and in some cases, employees acting in managerial capacities.
Q) What does D&O insurance typically cover?
A) It covers legal costs, settlements, and damages arising from allegations of mismanagement, negligence, or breach of fiduciary duties.
Q) Does the Companies Act 2013 allow indemnification of directors?
A) Yes, Section 197(13) permits companies to indemnify directors using D&O insurance, provided it doesn’t cover criminal acts proven in court.
Q) Why is D&O insurance important for startups and SMEs?
A) It protects founders and directors from personal liability risks, helping attract and retain talent and investors with legal safeguards.
About The Author
Rajesh
MBA Finance
With a wealth of expertise in the insurance realm, Rajesh is a distinguished writer specializing in articles focusing on directors and officers insurance for SecureNow. Boasting 9 years of experience in the industry, he profoundly understands the complexities surrounding directors and officers liability coverage. Their articles delve into the intricacies of D&O insurance, providing readers with invaluable insights into risk mitigation strategies and policy considerations. Renowned for their comprehensive knowledge and attention to detail, Rajesh is dedicated to delivering informative and engaging content that empowers individuals and businesses to navigate the complexities of insurance with confidence.
