Directors and Officers Liability Insurance

Directors and Officers (“D&O”) play a crucial role in running a company, making important decisions and bearing responsibilities towards various stakeholders. However, they are also susceptible to risks and personal liability for losses or harm suffered by the company arising out of the company’s acts during the course of their management. As a result, protecting such D&Os  from unnecessary claims is crucial.

References to D&O liability insurance (“D&O Insurance”) have been made under sections 197(13) and 149(8) read with Schedule IV of the Companies Act, 2013 (“Act”). However, obtaining a D&O Insurance has not been made mandatory under the Act.

Section 166 of the Act outlines the fiduciary duties of directors, including but not limited to (a) exercising due and reasonable care, skill, and diligence; and (b) not attempting to gain any undue gain or advantage. Failure of the D&Os to follow these duties could lead to several liabilities arising upon the company. The D&Os can also be held liable under other statutes, such as the Income Tax Act, 1961 (“IT Act”), the Goods and Services Tax Act, 2017 and other environmental and consumer protection laws.

The said D&O Insurance indemnifies D&Os against liabilities, except for those arising out of or in relation to fraud, wilful misconduct, bribery, insider trading, etc. Premiums paid by the company to the insurer shall not be considered to be a part of the D&Os’ remuneration, but if such D&Os are proven guilty of acting in contravention of the provisions of the Companies Act, 2013, it shall be considered to be  a part of their remuneration.

Under the IT Act, D&Os can be prosecuted with fines and imprisonment for (a) failure to deduct TDS(b) willful tax evasion; and (c) making false statements. The IT Act also imposes joint and several liabilities on every director of a private company for the recovery of tax dues.As per the provisions of the IT Act, directors who have either resigned or joined during the relevant previous year would be covered under the purview of the same.

Some of the specific exposures that make D&O Insurance necessary are:

• Vulnerability to shareholder/stakeholder claims
• Employment practice violations
• Regulatory investigations
• Accounting irregularities
• Exposures relating to mergers and acquisitions
• Corporate Governance requirements
• Compliance with various legal statutes

Protecting D&Os through D&O Insurance is essential in today’s corporate environment, as companies and directors face increased risks and exposure to liability.

About the Author

Darshana Chauhan

Senior Associate | darshana.c@treelife.in

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