• Rs 6-billion IDBI Bank-Aircel fraud case: Lens on independent directors – Business Standard
• Fortis left with three directors on Board after one more director resigns – Money Control
• SC bars Jaiprakash Associates directors, promoters from transferring personal assets – The Economic Times
Is the role of independent director getting more vulnerable than ever before?
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Wikipedia refers to non-executive director as under:
Non-executive directors provide independent oversight and serve on committees concerned with sensitive issues such as the pay of the executive directors and other senior managers; they are usually paid a fee for their services but are not regarded as employees.
A non-executive director (abbreviated to non-exec, NED or NXD) or external director is a member of the board of directors of a company or organisation who does not form part of the executive management team. They are not employees of the company or affiliated with it in any other way and are differentiated from inside directors, who are members of the board who also serve or previously served as executive managers of the company (most often as corporate officers). However they do have the same legal duties, responsibilities and potential liabilities as their executive counterparts.
(Source: https://en.wikipedia.org/wiki/Non-executive_director)
As regards the Indian context, Companies Act 2013 ( (hereinafter referred to as “Act”) does not define non-executive director. Inference has to be drawn from the definition of term ‘Executive Director’ provided under Rule 2(k) of the Companies (Specification of Definition Details) Rules, 2014, which reads as follows:
“Executive Director means a whole time director as defined in clause (94) of section 2 of the Act”
Section 2 (94) of the Act defines ‘Whole Time Director’ as under:
“Whole Time Director includes a director in the whole time employment of the Company”
The term Independent director is defined under Sec 149(6) of the Act and their liabilities are mentioned under Sec 149(12) of the Act.
Almost all the D&O policy wordings refer to the term “non-executive directors” in the extension relating to this benefit. While they do not make any specific reference to independent directors, coverage is available to them also as all independent directors are non-executive directors.
As the policy wordings vary from insurer to insurer, it is necessary for the buyers of the D&O policy to check if the coverage offered is clear, adequate and responsive. They may like to know the following: (besides any other aspects they feel relevant)
• Is the dedicated additional limit over and above the policy limit per person and / or in aggregate?
• Is the protection applicable only to the directors of the policy holder or all , i.e. including the directors of subsidiary companies?
• Is the dedicated additional limit available to all directors and officers or only non-executive directors? If the intention is to make the benefit available to all the directors, not just non-executive directors, the option of increasing the overall limit of policy itself can be considered.
• What provision is there in the policy for protection in case of any conflict of interest with the company which entails separate legal representation?
• Is the dedicated additional limit available for the claim where the policy limit is getting exhausted or the next claim?
• If an individual D&O policy is obtained by any non-executive director, how does this respond?
• Is the dedicated additional limit available only when there is no other indemnification available – not necessarily insurance indemnification. In other words, does this extension operate only if the insured organization is unable to pay as in Side A claim?
• Is this coverage associated with any additional conditions?
It is necessary for Independent directors to seek all details of D&O coverage. As per the Companies Act 2013, their letter of appointment ought to make reference to the provision for Directors and Officers (D and O) insurance, if any, in conformity with Code for Independent Directors (IV; Manner of appointment).
More details on the other aspects of coverage for independent directors can be accessed on https://www.dandodiary.com/2016/05/articles/international-d-o/guest-post-independent-directors-in-india-risk-exposures-safeguards-and-insurance-protection
P. Umesh
Currently an independent consultant pursuing interest in liability insurance.
p.umesh@liabilityinsurancepractice.com
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Disclaimer: The information contained and ideas expressed in this article represent only a general overview of subject 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 advisers regarding specific coverage and/or legal issues.