Introduction
A Company, despite being a legal entity is an artificial person that relies on a group of natural persons, particularly directors, who play a pivotal role in steering it towards its strategic and financial objectives. They assume responsibilities with the aim of advancing the company's interests and maximising its profitability. However, in the course of fulfilling these responsibilities, directors are exposed to various risks that may render them jointly, severally, or personally liable for any loss or damage suffered by the company. To safeguard against potential risks, Directors & Officers ("D&O") Liability Insurance provides coverage for liabilities stemming from decisions or actions taken by directors while performing their duties in the normal course of business. In this article, we shall briefly analyse the D&O liability insurance in the context of its increasing relevance in India given the evolving legal scenario, multifaceted nature of liabilities and global landscape.
Duties of Directors
Under the Companies Act, 2013 ('Act'), a director is defined as an individual appointed to the board of a company. Directors may serve in various capacities, including Independent Directors, Managing Directors, Whole-Time Directors, Nominee Directors, Executive Directors, and Non-Executive Directors, each with distinct roles in management and governance.
Directors must act in good faith and in alignment with the company's constitutional documents, always promoting its objectives. Under the Act, they are expected to exercise care, skill, diligence, and independent judgment, and must avoid conflicts of interest or attempts to gain undue advantage for themselves, their relatives, partners or associates. If guilty of such gains, they shall be liable to pay an amount equal to that gain to the company. Directors are also prohibited from assigning their office, and any such act is void.
Directors also bear statutory duties under the Act, including the timely preparation and filing of the company's annual returns, and the presentation of financial statements for each financial year at the annual general meeting.
Liabilities of Directors
The liabilities of the Directors can broadly be classified into civil and criminal liabilities.
- Civil liabilities primarily involve monetary fines imposed on
directors for various non-compliance issues. These penalties are
generally administrative in nature and do not involve imprisonment.
For instance:
- A director contravening its duties under Section 166 is liable to a fine not less than ₹1 lakh and which may extend to ₹5 lakhs.
- If financial statements are improperly disclosed, the company may be fined ₹3 lakhs, and each officer in default may face a fine of ₹50,000.
- Failure to appoint Key Managerial Personnel can result in fines starting at ₹50,000 and reaching up to ₹5 lakhs for both the company and its directors.
- Directors breaching managerial remuneration limits may also incur fines ranging from ₹1 lakh to ₹5 lakhs.
- Criminal liabilities may arise for directors under various provisions of the Act, with Section 447 being particularly significant. It addresses fraud such as misrepresentation, concealment, or asset misappropriation and prescribes penalties of up to 10 years imprisonment or fines up to three times the fraud amount. Fraud includes deliberate misrepresentation, concealment of facts, or other dishonest practices aimed at deceiving stakeholders or misappropriating company assets. The Delhi High Court, in Prabhat Kumar Srivastava v. Serious Fraud Investigation Office1, held that there is no requirement of any loss to have occurred to prove fraud under Section 447. Section 447 of the Act can be invoked upon the directors when there is an act, omission, concealment of any fact or abuse of position committed with an intent to deceive or to gain undue advantage from or injure the interests of the company. Thus, there is no requirement of a wrongful loss to the company or wrongful gain made by the director. The proof of intent to deceive is the threshold set by the Court for the offence of Fraud under Section 447 of the Act.
In addition to the aforesaid civil and criminal liabilities under the Act, directors may also face vicarious liability under other Indian statutes. The Negotiable Instruments Act, 1881 provides that every person who, at the time the offence was committed, was in charge of and responsible for the conduct of the company's business can be deemed guilty and prosecuted along with the company.
Directors are not liable merely by virtue of holding office; vicarious liability arises only when they are directly involved in or responsible for the specific acts conducted on the company's behalf. This principle was firmly established by the Supreme Court in S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla and Ors.2 where it was held that directors can only be held criminally liable vicariously if they were in charge of and actively involved in the conduct of the company's business at the time the offence occurred. The Supreme Court reaffirmed this position in the recent judgment of Sanjay Dutt v. The State of Haryana and Ors.3 clarifying that vicarious liability cannot be imposed automatically. It must be supported by a statutory provision that expressly provides for such liability, and there must be clear evidence linking the director's role to the commission of the offence.
When directors face potential personal liability for actions carried out in the company's name, D&O Liability Insurance becomes a vital safeguard mitigating financial and legal risks arising from such vicarious exposure.
Exemption of liabilities for Independent Directors and Non-Executive Directors:
Under Section 149(12) of the Act, independent and non-executive directors have limited liability, and shall be held liable only in respect of such acts of omission or commission by a company which had occurred with their knowledge, attributable through Board processes and with their consent or connivance or where they had not acted diligently. In this regard, Ministry of Corporate Affairs released a Circular dated March 2, 2020, clarifying that independent and non-executive directors should not be arrayed in civil or criminal liabilities under the Act, unless the criteria in Section 149 (12) is met. .
Hence, although, Section 149 (12) of the Act in a way restricts the liability of the independent and non-executive directors, however, the possibility of legal proceedings cannot be entirely ruled out, making D&O liability insurance essential for protecting against potential financial and legal exposure related to board-level oversight.
Officers in Default
A director's liability may significantly increase when deemed an "officer in default." Under Section 2(59) of the Act, the term "officer" broadly includes managers, key managerial personnel, directors, and those whose instructions the board acts upon. Directors with substantial decision-making authority or operational control are particularly susceptible. Section 2(60) of the Act further provides that officers in default may face penalties, including fines, imprisonment, or other forms of punishment.
D&O Liability Insurance
Given the multifaceted nature of potential liabilities, be they civil, criminal, vicarious, or in the capacity of 'an officer in default', the need for D&O liability insurance becomes not just prudent, but essential. It acts as a crucial safeguard, shielding directors from personal exposure arising from decisions made in the course of their duties.
D&O Liability Insurance provides financial protection from personal liability stemming from lawsuits related to decisions made within the scope of their roles. It typically covers claims involving breach of duty, misstatements, errors and omissions, and civil fines and penalties.
It is significant to note that D&O Liability Insurance does not provide coverage for claims resulting from intentional acts such as fraud, wilful misconduct, bribery, insider trading, or other similar breaches of ethical or legal conduct.
This coverage is a vital safeguard in today's regulatory landscape, particularly under statutes such as the Companies Act of India which impose stricter accountability for corporate decision-making.
A. Regulatory framework for D&O Liability Insurance: The Act affirms a company's right to procure D&O liability insurance for its officers, including directors. While such insurance is not mandated, Section 197(13) of the Act stipulates that when a company obtains coverage for its managing director, whole-time director, manager, Chief Executive Officer, Chief Financial Officer, or Company Secretary, specifically to indemnify them against liabilities arising from negligence, default, misfeasance, breach of duty, or breach of trust in relation to the company, the premium paid shall not be treated as part of their remuneration.
Additionally, Schedule IV of the Act, which sets out the Code for Independent Directors, stipulates that the appointment of independent directors must be formalised through a letter of appointment, which should also specify the provision for D&O insurance.
Acknowledging the increasing exposure and significant responsibilities of Independent Directors, which often deters well- qualified and competent professionals from accepting such appointments, it is noteworthy that theKotak Committee Report on Corporate Governance, 2017 ("Kotak Committee") recommended that the top 500 companies by market capitalization be mandated to procure D&O liability insurance for its independent directors with effect from October 1, 2018. This recommendation underscores the need to mitigate the personal risk borne by Independent Directors and promote greater confidence in accepting such positions. The Kotak Committee also recommended that this requirement be progressively extended to all listed entities. However, it entrusted individual boards of directors with the discretion to determine the appropriate extent and nature of risk coverage under the relevant insurance policies.
Acting on the Kotak Committee's recommendations, the Securities and Exchange Board of India ("SEBI") amended the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. Through the introduction of Regulation 25(10) thereof, SEBI now mandates that the top 1000 listed companies by market capitalisation must procure D&O liability insurance for all independent directors, with the quantum and scope of coverage to be determined by the board of directors.
B. Coverage provided by the D&O Liability Insurance: Since Indian laws do not provide specific coverages that can be provided by insurance companies, the coverage under D&O liability insurance is determinant on the policy structure adopted by the company, which in turn depends on the insurance companies. Insurance companies typically provide coverages such as:
Personal Coverage: Protects the personal assets of directors and officers when the company cannot indemnify them; and/or
Corporate Reimbursement Coverage: Provides reimbursement to the company for amounts it pays on behalf of its directors and officers; and/or
Entity Coverage: provides protection to the company itself when it faces legal action alongside its directors and officers. This coverage is particularly valuable for publicly traded companies, as it helps mitigate financial exposure stemming from allegations related to governance lapses, regulatory non-compliance, or inadequate disclosures.
C. Limitations of D&O Liability Insurance: While D&O liability insurance offers vital protection, its coverage is constrained by policy limits, which cap payouts per claim or in total. Additionally, retentions, i.e. amounts that the insured entity must pay before the policy responds, further restrict coverage, especially in corporate reimbursement and Entity Coverage policies. Therefore, although D&O insurance provides meaningful financial safeguards, it does not guarantee complete indemnity. Coverage details vary by policy and must be reviewed individually.
D. Scope of D&O Liability Insurance in India vs. Global Standards: The Indian framework for D&O liability insurance, while evolving, remains less detailed. While the Act and the LODR Regulations acknowledges a company's right to procure D&O insurance and allows indemnification of directors, it does not comprehensively specify the types of liabilities that can covered, leaving much to the discretion of individual companies and insurers. Several jurisdictions around the world provide more robust and clearly defined statutory frameworks for director indemnity and insurance compared to India's current provisions:
United Kingdom: The Companies Act, 2006 delineates the limits of indemnification and explicitly permits companies to procure insurance for directors. This offers structured and predictable protection aligned with UK corporate governance standards.
New Zealand: Under the Companies Act, 1993, the law goes a step further by detailing the specific types of liabilities that may be covered by insurance, bringing clarity and consistency in application.
United States: The Companies Act, 2004 specifically affirms directors' statutory rights to indemnity and insurance, thereby reinforcing legal safeguards and encouraging responsible corporate leadership.
India can benefit significantly from aligning with these international practices. By introducing clear statutory guidelines on D&O insurance, including clearly defined indemnifiable liabilities, standardised policy structures, transparent disclosure norms. This would aid in boosting investor confidence, enhancing transparency in corporate governance, and support directors in making bold, growth-oriented decisions without undue legal risk. Such reforms would not only foster a more secure governance ecosystem but also strengthen India's standing as an investor-friendly destination.
Conclusion
The Indian legal scenario is constantly evolving with increasing regulations imposed on companies and its directors by regulatory bodies. Further, with the increasing burden on the Courts and the costs due to the same, the need for D&O liability insurance is solidified as an essential one. An additional concern can be the evolving nature of liabilities like the imposition of vicarious liabilities and the standard for the same being provided by the Courts in varying judgements. These create an uncertainty on the extent of risk the directors are exposed to.
It is pertinent to note that the increasing scrutiny of the directors has led to a 25-35% increase in demand for D&O liability insurance in 2025 with an 85% percent renewal of existing policies as noted in a survey conducted by Business Standard.4 While the average sum being insured varies upon the size of the firm and the risks that they are being exposed to, D&O liability insurance has emerged as a significant need for companies to not just protect themselves from the financial losses but also as a business strategy to retain directors and attract investments. However, looking at the legal provisions regarding D&O liability insurance in India, a gap can be noted surrounding the same.
Footnotes
1 2021 DHC 1098
2 AIR 2005 SC 3512
3 2025 INSC 34
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
