In the following guest post, Umesh Pratapa takes a look at status in India of D&O insurance in light of The Companies Act of 2013. The guest post also reviews the prudential considerations supporting the purchase of D&O insurance for Indian companies. I would like to thank Umesh for his willingness to publish his article on my site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is Umesh’s guest post.
Often a question is raised whether a D&O liability insurance policy is mandatory as per Companies Act 2013 or any statute for any Indian company, and particularly for a listed company in India. In straightforward terms, the answer is NO.
However, pertinent to this question, I refer below to several provisions of The Companies Act 2013. As these provisions show, the Companies Act of 2013 recognizes the right of companies to purchase D&O insurance.
Sec 197 (13)
Where any insurance is taken by a company on behalf of its managing director, whole-time director, manager, Chief Executive Officer, Chief Financial Officer or Company Secretary for indemnifying any of them against any liability in respect of any negligence, default, misfeasance, breach of duty or breach of trust for which they may be guilty in relation to the company, the premium paid on such insurance shall not be treated as part of the remuneration payable to any such personnel:
Provided that if such person is proved to be guilty, the premium paid on such insurance shall be treated as part of the remuneration.
Code for Independent Directors
IV; Manner of appointment
The appointment of independent directors shall be formalized through a letter of appointment, which shall set out: (a) the term of appointment; (b) the expectation of the Board from the appointed director; the Board-level committee(s) in which the director is expected to serve and its tasks; (c) the fiduciary duties that come with such an appointment along with accompanying liabilities; (d) provision for Directors and Officers (D and O) insurance, if any;
Thus, while D&O insurance is not mandatory in India, it is permitted, as these provisions of The Companies Act show. In that regard, I also refer here to the relevant part of the NSE Quarterly Briefing April 2014
“Third, and related to the previous, the 2013 Act implicitly recognizes the right of the company to obtain directors’ and officers’ (D&O) insurance policies by paying a premium. The practice of obtaining (D&O) insurance has already become prevalent in Indian companies, especially among the larger ones, and is only likely to grow in future in view of the expansive liability regime under the new law. While obtaining adequate level of D&O insurance policies would be prudent for all boards and directors, care should be taken to ensure that policies are accompanied by specific exceptions for fraud, wilful misconduct and other forms of intentional criminal conduct”.
(Extract from Quarterly Briefing April 2014 | No. 5 DIRECTORS’ DUTIES AND LIABILITIES IN THE NEW ERA – Chief Contributor – Umakanth Varottil). This article can be accessed on https://www.nseindia.com/research/content/res_QB5.pdf.
In short, the Companies Act of 2013 recognizes the right of companies to purchase D&O insurance; D&O insurance is becoming increasingly common; and the purchase of D&O insurance is a prudent business practice, for reasons discussed further below.
With ever increasing complexities of business and changing economic and legal landscape, demands are mounting on directors in relation to discharge of their duties. Directors are expected to be professional and result orientated and they have to work towards fulfilling the expectations of all the stake holders and not just that of shareholders. If organizations have to perform and achieve, management has to be ready to take risks – well considered and without any malicious or ulterior motives. When can one take a risk? When one feels that he/ she has done his/ her duties with all the care and caution and when the consequences of their actions do not cripple them. But, we are in an unforgiving world. People may be allowed to make mistakes. But, they are expected to pay for it, should things go wrong.
A director’s personal liability is unlimited placing all his personal assets at risk. Unlike the Company, he cannot take shelter under limited liability. Directors are jointly and severally liable. It is the directors who manage the assets and control the company’s day to day affairs. Directors are liable personally to pay losses suffered by the Company following an act which is wrong, negligent, outside the Company’s authority, beyond their power, or which evidences insufficient skill and care in managing the Company’s affairs.
Directors and officers are bound by duty towards various stake holders — shareholders, employees, creditors, customers, competitors, members of the public, government and other regulatory bodies. Any breach or non-performance in the duties can result in claims against them by reason of any wrongful act, actual or alleged, in their respective capacities.
Obviously, there is no substitute for good corporate governance where fair play and transparency characterize the working and boards assume responsibility to all the stake holders- and not only to major shareholders. Empowering legislation and best practices in the rulebook may not necessarily guarantee protection against litigation by any stake holder in view of the increasingly complex set of laws that govern the business environment world over and in India. With all the care and caution, should anything go wrong, what is the protection for directors and officers whose liability is personal, unlimited, joint and several. The answer is a good Directors and Officers liability insurance cover which aims to provide relief to directors and officers, who may, notwithstanding all their best intentions and practices, end up in some negligent acts – actual or alleged.
D&O insurance affords protection to directors and officers from liability arising from actions connected to their corporate responsibilities. The policy provides indemnity to the directors and officers in respect of:
- Legal costs in defending proceedings brought against them alleging wrongful acts.
- Any damages awarded to the claimants against the Directors and Officers, including out of court settlements.
How does a good D&O liability insurance help?
Introduction of corporate governance regulations and heightened monitoring does not guarantee that we see the last of corporate governance collapses. Should that collapse happen, there should be protection and relief to the affected parties. D&O insurance does not dilute the need for corporate governance. It offers help as given below:
- Improve the company’s ability to recruit qualified and suitable directors and officers. Directors designated are beginning to insist on a good D&O policy before assuming duties. With the sweeping changes in the expectations from and the responsibilities of the directors, it is becoming increasingly necessary for the persons intending to become directors to seek protection in some form or the other.
- Enhance the defense of claims against directors which, besides financial consequences, may involve injury to reputation.
- The increase in public interest litigations, environmental petitions and customer grievances significantly enhances the exposures of directors. This makes it very important for the directors to protect themselves against such risks.
- Globalization has also resulted in Indian companies, particularly from the knowledge-based sectors, increasingly accessing the global markets for capital as well as acquiring and setting up companies in other countries. This opens up a lot of new challenges and risk exposures facing which will be difficult for the directors without a proper D&O policy. Globalization inevitably exposes Indian corporate management to a variety of different legal cultures, be it in the US, Europe, Australia or Asian countries.
- The evaluation of a D&O proposal may reveal valuable information about the company and the quality of its corporate governance. Since insurers, in the course of underwriting, are expected to analyse the systems, processes, past performance and other aspects influencing the performance of the corporates, it is likely that governance deficit increases litigation risk resulting in higher insurance premium/ restricted cover. This feedback may help in course correction by the corporates.
A D&O liability insurance policy is not a replacement for sound management & corporate governance. But, a good policy helps in as much as it reduces the apprehensions and addresses the concerns of the directors& officers so that they can concentrate on their work to take the company on growth path in a sustained manner. It is stakeholder’s interest and not only shareholders interest that would dictate future direction of the corporate governance and directors need to ring fence their liabilities with an appropriate D&O policy.
D&O liability insurance policy, while it is not mandatory, is an important and integral part of corporate governance, as it protects the directors and officers against personal liabilities and also may ensure relief to the victims of corporate governance breakdowns.
Currently an independent consultant pursuing interest in liability insurance.
Disclaimer: The information contained and ideas expressed in this article represent only a general overview of subjects covered. It is not intended to be taken as advice regarding any individual situation and should not be relied upon as such. Insurance buyers should consult their insurance and legal advisors regarding specific coverage and/or legal issues.