D&O Insurance for Independent Directors under Companies Act 2013

Directors and Officers (D&O) insurance is a type of liability insurance. It protects directors and officers of a company from financial losses due to legal actions taken against them for alleged wrongful acts committed while carrying out their duties. Independent directors, who are not employees of the company, are also covered by D&O insurance. D&O insurance for independent directors under the Companies Act, 2013 is mentioned under section 197(13).

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D&O Insurance for Independent Directors

D&O insurance for independent directors under companies act 2013 is an important consideration for both the directors and the companies they serve. Independent directors may be held personally liable for wrongful acts committed while carrying out their duties. For example, they may be held responsible under various circumstances. 

This may include breach of fiduciary duty, negligence, misrepresentation, or violation of securities laws. In such cases, the director may be sued by the company, shareholders, regulators, or other stakeholders.

Companies Act 2013 and Independent Directors

The Companies Act, 2013 introduced the concept of independent directors to Indian company law. The Act mandates that a certain percentage of the board of directors of certain classes of companies must be independent directors. Independent directors are not employees of the company. 

They are appointed to provide an objective and independent perspective to the board's decision-making process. They are expected to bring in their expertise and experience to the board. Further, they are also expected to provide a check on the executive management.

Benefits of D&O Insurance for Independent Directors

Some of the benefits of D&O insurance for independent directors under Companies act 2013 include the following.

Protection against Personal Financial Loss

D&O Policy covers the legal expenses and damages awarded against an independent director in a legal claim. This reduces the risk of personal financial loss.

Improves Recruitment

Independent directors are more likely to join a board if D&O Policy is provided. It offers protection against potential lawsuits.

Better Decision-making

With D&O Policy in place, independent directors can make bold decisions without worrying about potential legal consequences.

Coverage and Exclusions

D&O insurance for independent directors under Company act 2013 typically covers a range of legal actions. This includes claims for breach of fiduciary duty, negligence, misrepresentation, and violation of securities laws. The policy may also cover claims for employment practices liability, such as discrimination or wrongful termination.

However, there are certain exclusions to the coverage provided by D&O policy policies. For example, intentional or criminal acts are generally not covered. Claims arising from the director's personal financial dealings with the company may also be excluded. 

It is important for independent directors to understand the scope of the coverage provided by the policy. They must also consult with their policy provider in case of any doubts or questions.

Case study

Mr. Ravi is an independent director on the board of a mid-sized manufacturing company. The company operates in a highly regulated industry. Mr. Ravi is responsible for overseeing the company's compliance with all relevant laws and regulations. He is also tasked with ensuring that the company operates ethically and responsibly.

One day, the company was hit with a lawsuit from one of its suppliers. They alleged breach of contract and sought damages. The supplier claimed that the company failed to fulfil its obligations under the contract. This resulted in significant financial losses. 

The supplier also alleged that Mr. Ravi, as an independent director, failed to exercise his duties with due diligence and care. Therefore he was found negligent in his duties.

In this scenario, Mr. Ravi's D&O policy would provide coverage for any legal costs incurred by him in defending against the supplier's allegations. The insurance would also cover any damages awarded against him. This would include an amount up to the policy limit.

Without D&O policy, Mr. Ravi could be personally liable for any damages awarded against him. This could have a significant financial impact on his finances. Furthermore, the legal costs associated with defending against the lawsuit could be substantial. Without insurance, he may not have been able to afford adequate legal representation.

Conclusion

D&O insurance for independent directors under Companies Act 2013 is an important protection for independent directors. It offers coverage against legal liabilities arising out of their duties and responsibilities. It provides protection against financial loss, improves recruitment of independent directors, and allows for better decision-making. Companies should consider providing directors and officers liability insurance to their independent directors to mitigate potential risks.

Written By: PolicyBazaar - Updated: 18 May 2023

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