Directors and Officers Liability insurance is a liability insurance covering Directors and Officers of a company from claims made against them when they are serving on a company’s Board of Directors or as an officer. The insurance covers for damages and defence costs as well as other related costs incurred due to claims against them, demanding damages as a consequence of financial losses.
It is important to understand the liabilities of directors to understand the significance of a D&O liability insurance policy. Directors and officers face a wide and growing range of potential personal liabilities in the course of carrying out their duties. A directors’ and officers’ liability insurance policy (or “D&O policy”) can help protect against these risks.
The new Companies Act, 2013 imposes stricter civil and criminal penalties on the directors and officers, and has broadened the statutory duties of a Director to act in their best interest not only towards the company, but also the shareholders, employees and community. Some examples of liabilities that can be imposed against Directors and Officers are:
- Breach of Fiduciary Duties
- Liabilities related to Employment Practices
- Shareholder / Stakeholder Claims
- Discrimination and Sexual Harassment Allegations
- Investigations conducted by Regulatory Bodies
- Irregularities in Accounting and Book Keeping
- Exposures arising out of Mergers and Acquisitions
- Violation of Corporate Governance regimes
- Liabilities under various Acts, apart from the Companies Act
- Tax Liability – According to the Income Tax Act, if a company defaults in the payment of Income Tax for any previous years, then the Directors will be held liable for this default.
- False Statement in Company Prospectus – Directors will be liable for any false / misstatements in a company’s prospectus.
- Company Debts – Though not personally liable, if it is proven that he was involved in an unlawful activity, the Director shall be held personally liable.
- Fraudulent Business Conduct – Directors and Officers in their personal capacities have a fiduciary responsibility to act towards the company’s interests, if the concerned person is involved in malicious, wrong or fraudulent, he shall be held responsible.
- Dishonoured Cheques
- Labour Law Offences
- Environmental Law Offences
- Money Laundering Offences
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