The Role of Independent Directors in Indian Companies and Their Need of D&O Insurance

An independent director is solely responsible for the overall growth of the company or firm. He is also known as an outsider director. The independent director is a member of the board of directors who are expected to bring an unbiased and unique perspective to the growth of a company. Nevertheless, the directors are prone to several risks. It is important to know the meaning of independent directors and why do they need for D&O insurance.

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Independent Directors and Why Do They Need for D&O Insurance?

An independent director is an outsider to a firm or company. He is not an employee. Further, he does not hold any stake in the company. However, he serves the company in the following methods.

  • He improves the strategy of the company
  • He provides excellent leadership for the growth and development of the company
  • He put his efforts into the governance of the company
  • He plays a vital role in the planning of the company
  • He works as a liaison between the issues of management and its shareholders

In order to accomplish the aforementioned tasks, independent directors are required to take some crucial decisions. However, such decisions may give rise to disputes. Therefore, the company directors need directors and officers insurance policy.

Let us discuss more about independent directors and why they need a D&O insurance policy.

The independent directors and why they need a D&O insurance policy individually have several meanings and reasons. The independent directors hold no material relationship with the organisation. They provide creative ideas to the company for growth and development. However, they are prone to several types of risks.

Given below are the reasons which state about independent directors and why do they need for D&O insurance policy.

  • Protection against Personal Liability

    Independent directors have a major role to play in the affairs of the company. Their appointment is seemed a crucial one. It may affect other directors or stakeholders of the firm.

    Hence, it may lead to the filing of several lawsuits. In addition, the NGOs and government bodies unsatisfied with the strategy of the company may hold them responsible for several liabilities. It may affect the harmonization of the organisation with its growth.

    Such issues or risks need to be eliminated or mitigated in order to ascertain the smooth flowing of the company's goal. In addition, it is the duty or responsibility of the firm to ensure that its practices do not compromise the personal wealth of the directors.

    Personal wealth is a sufficient cause to answer the meaning of independent directors and why do they need for D&O insurance policy.

  • Mitigate Legal Cost

    Independent directors are prone to several kinds of risks. One such risk includes legal issues. They may get stuck in a legal case which may compromise their wealth and time. A third party aggrieved by the decision and direction of an independent director may institute a lawsuit.

    The lawsuits in India take months and years to resolve. In addition, the court may also direct the parties to move the tribunal or other courts. It includes several orders, decrees and judgments which may or may not be in favour of the insured.

    On top of that, the insured may lose his wealth. In order to avoid the risk of litigation, the independent director must subscribe to the D&O insurance policy. The D&O policy appoints an attorney in case of filing lawsuits. In addition, the insurance policy also provides appropriate damage to the third party in case of loss incurred due to the insured.

Conclusion

Independent directors are appointed by the board of directors of the company. They play a crucial role in the decision-making of an organisation. In addition, they are explicitly and implicitly associated with the aftermath of a company's operation. Hence, such an association may give rise to risks. Therefore, they must subscribe to directors and officers liability insurance.

Written By: PolicyBazaar - Updated: 29 May 2023
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