3 Ways A Directors Insurance Important for Any Type of Company

Full Title: 3 Ways in Which Companies Act 2013 Makes A Directors Insurance Very Important for Any Type of Company?

Running a company in India means that you have to abide by Indian company laws and acts. Various acts govern the incorporation of a company and define the responsibilities of its directors, one of which is the Companies Act 2013.

The newly introduced Act comes with significant changes in its various sections to protect the interest of shareholders and other stakeholders in a company. These changes also correlate with the roles and responsibilities of the directors and officers.

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Running a successful company in India but haven’t bought a Directors and Officers liability insurance? You need to know how it is connected to the Companies Act 2013.

Correlation Between D&O Insurance and Companies Act 2013

1. Class Action

Many small and big companies are running on funds raised from investors and shareholders. However, investors couldn’t file a lawsuit against the company for losses as per the Companies Act 1956.

This shortcoming of the Act was later amended through Section 245 of the 2013 Act. The amended Act says that investors and shareholders can file a class action suit against the company or its directors before the National Company Law Tribunal. This has increased the risk of directors and officers being held accountable for wrongful acts.

2. Directors’ Responsibilities

Section 166 of the Companies Act 2013 widens the roles and responsibilities of the directors and officers of a company. It says that they must act in good faith for the best interest of the company, its shareholders and employees. Furthermore, they shouldn’t be involved in situations wherein their interest conflicts with the interest of the company.

It also stipulates that if they contravene these provisions of the new Act, they will be held liable to pay for a fine of Rs. 1,00,000 to 5,00,000.

3. Maximum Managerial Remuneration

Section 201 of the Companies Act 1956 said that any provision given to indemnify the directors and officers against any liability is void.

On the contrary, Section 197 of the 2013 Act talks about the total remuneration payable to the companies’ directors in any financial year. Specifically, section 197(13) says that the premium paid for the Directors and Officers liability insurance by the company shall not be treated as a part of the total remuneration. The company buys this to indemnify them against liabilities related to negligence, default, or breach of duty.

In case the directors are proved guilty, the D&O insurance premium will be considered a part of the remuneration payable.

Importance of D&O Insurance

It is a tough task to handle the various stakeholders of your company. As per the Companies Act 2013, directors are at relatively higher risk of being held accountable for unintentional acts and also for paying for any legal costs involved.

Since they work for the company’s best interests, they deserve to be protected with Directors and Officers (D&O) liability insurance.

Keep in mind that D&O insurance also has certain exclusions based on which you won’t get insurance coverage in case of any lawsuits. These are:

  • Deliberate dishonest and malicious acts
  • Prior claim history

In our current, fast-moving world of business, prompt decision-making is the key to growth. For this, directors often get involved in day-to-day operations. This makes them vulnerable to costly lawsuits from shareholders, regulators, and even the target audience. Keeping this in view, you must buy Directors and Officers liability insurance with coverage limits based on your specific business needs. If you want help from experts with in-depth knowledge of D&O insurance, choose SecureNow – a dynamic insurance broking firm.

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