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 Insurance has been gaining popularity. The D and O insurance is mentioned under section 197(13) under the Companies Act-2013.
The Director’s and Officer’s insurance is a type of liability insurance, which is a relatively newer concept in the Indian Corporate scenario and is yet to become the corporate custom.
What is Directors and Officers (D&O) Insurance?
Directors & Officers Insurance Policy 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. It also protects them from legal expenses and potential liabilities arising from their management decisions. It’s 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?
A wrongful act in the context of Company Act insurance is an act, error, or omission that is committed by a director or officer of a company in the course of their duties and that 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 Directors Officers Insurance Important for Both Public and Private Limited Companies?
#1 Board of Directors liability insurance provides personal asset protection for directors and officers in the event they are sued individually for alleged wrongful acts or negligence. Without this coverage, directors and officers may be personally liable for legal expenses and potential damages, putting their personal assets at risk.
#2 Offering D & O insurance coverage is an attractive benefit for directors and officers. It helps companies attract and retain highly qualified individuals for executive positions.
#3 Directors and officers can face significant 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. Director and Officers insurance helps mitigate these financial risks by providing coverage for legal expenses and potential liabilities. It allow directors and officers to focus on their duties without undue financial burden.
#4 D&O policy e plays a crucial role in promoting good corporate governance.
#5 Directors 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.
