In general, the term indemnification refers to one party agreeing to or being required to cover the expenses that another party incurs. For corporates (usually corporations or companies with limited liabilities), this involves indemnifying directors and officers. This means a directors & officers liability policy provides indemnification that covers legal expenses, defense, and settlement amounts that directors and officers incur while serving the organization.
Key Takeaways
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The Legislative Shift: The 2013 Act was a game-changer. It moved away from the 1956 rule that only allowed indemnity after acquittal. Now, companies can support their directors from the moment a claim is filed, even in cases of alleged negligence.
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The “Deed of Indemnity”: This is a binding legal contract between the company and the individual director. It ensures that the promise of protection isn’t just a board resolution that could be changed later—it is a personal guarantee of financial support.
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Attracting Top Talent: High-caliber directors in 2026 rarely accept board positions without a robust D&O policy and a signed Deed of Indemnity. It is considered the “safety belt” of the corporate boardroom.
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Insurance vs. Assets: While a company can indemnify directors using its own balance sheet, D&O Insurance is preferred because it protects the directors even if the company itself becomes insolvent or refuses to pay.
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Loans for Defense: The 2013 Act allows companies to provide “loans” to directors to cover their legal defense costs as they arise, rather than making them wait years for a court verdict to get reimbursed.
Laws regarding indemnification in India
In India, the Companies Act, of 1956, did not permit corporates to indemnify their directors and officers in cases of breach of duty or negligence. Organizations could indemnify directors and officers only for liabilities incurred during defense in civil or criminal proceedings where they had been acquitted.
However, the Companies Act, of 2013, amended these provisions. So, now, an organization can have an indemnification policy for its directors and officers against any liabilities they incur in cases alleging negligence, breach of duty or trust, etc.
How companies indemnify directors and officers
Corporate indemnification is critical to protect directors, officers, and other key employees in an organization. Often, dissatisfaction with an organization manifests in action brought against directors and officers. In fact, many top-level directors might refuse roles if the organization does not agree to indemnify them against personal liabilities.
Organizations can indemnify their personnel in different ways. One way is through the organization’s assets. Another way is by purchasing D&O liability insurance to provide cover against personal liabilities. This insurance offers comprehensive coverage in liability cases against a company’s directors. Thus it acts as a support system in cases where the company does not indemnify directors through its assets. In fact, the cover in a D&O is quite extensive because it insures the board of directors as well as key executives for such liabilities.
Summary: D&O Indemnification & The Companies Act
Putting it down in writing
A contractual agreement, known as a ‘Deed of Indemnity’, helps highlight the Directors and officers indemnification provisions of an organization. It states the protection the organization will provide for directors or officers implicated in legal claims and procedures. Usually, such protection takes the form of financial support for costs incurred in defense and claim settlement. The deed also contains provisions for the organization to provide a loan to directors or officers to cover such costs.
Additional Read: What are Side A, B and C covers in a D & O policy?
Frequently Asked Questions (FAQs)
Q1: Can a company indemnify a director who is found guilty of fraud?
No. Under the Companies Act, if a director is found guilty of “fraud” or “dishonesty” against the company, the indemnification becomes void. In such cases, the director may even be required to pay back any legal expenses the company or insurer covered during the trial.
Q2: What is the difference between D&O Insurance and a Deed of Indemnity?
The Deed of Indemnity is a contract where the company promises to pay the director’s legal costs. D&O Insurance is the financial tool the company buys to make sure they have the money to fulfill that promise. Think of the Deed as the “Promise” and the Insurance as the “Funds.”
Q3: Does the indemnification cover civil penalties and fines?
Usually, yes. Most modern D&O frameworks in India cover compensatory damages and settlements. However, “Punitive Fines” or penalties imposed by a criminal court for breaking the law are generally not indemnifiable.
Q4: Can a company indemnify a director for a lawsuit filed by the company itself?
This is complex. Generally, D&O policies and indemnity deeds focus on “Third Party” claims (shareholders, regulators, creditors). If the company sues its own director for misconduct, they typically do not provide indemnity for that specific defense.
Q5: Is it mandatory for every Indian company to have a D&O policy?
While not mandatory for all, it is highly recommended. For listed companies and those in highly regulated sectors (like Finance or Tech), having a D&O policy is considered a “best practice” and is often expected by institutional investors and independent directors.
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.
