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.
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.
Putting it down in writing
A contractual agreement, known as a ‘Deed of Indemnity’ helps highlight the 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?
