Directors And Officers Liability Insurance (D&O)
Categories: Board of Directors, Regulations, Incorporation, Insurance
Companies get sued all the time. They miss a quarter. They flub a press release in a moment of ADD. They have bad actors in them (not Nick Cage but actual evil-doers).
So they carry D&O insurance.
Why?
Because at the end of the day, beyond the company, it's the Board of Directors who are where the buck stops.
Should a company lose a massive suit—it was dumping iodine in the rivers and now all the downstream fish are blind (not a Seussian allusion)—the D&O insurance might then kick in.
How?
Well companies define policies differently, but a typical one might cover a lawsuit from bad corporate management—maybe a sexual harrassment suit or an improper disclosure of insider stock sales.
The company has a $15 million deductible and receives a $50 million judgment from the SEC. But because the insurance company backing them has armies of lawyers who know how to delay and mess with and muck up the legal process on behalf of their clients, the $50 million is negotiated down to $32 million.
In this case then, the company pays $15 million—the insurance company picks up the next $17 million and likely raises rates to the company...or fires them. D&O policies almost never kick in—and when they do, it's...bad.
Related or Semi-related Video
Finance: What is Directors & Officers In...100 Views
finance a la shmoop what is directors and officers insurance coverage? well if
you ever sit on the board of a public company you'll want this or at least a [People sat at a table in a meeting]
feeling you'll sleep better at night if you have it. D&O insurance is just
insurance like any other kind of insurance only it insurers for board
stupidity or rather legal definitions of dumb things companies do that costs
shareholders money and for which the Board of Directors then gets blamed and
sued in theory if company ever lost a large lawsuit well at worst they would [Man and woman in a court]
just hand over the keys to the company itself to whoever won the lawsuit
famously warren buffett founder and CEO Berkshire Hathaway and the largest
seller of insurance in the world through Geico and other subsidiaries does not
allow his Board of Directors to carry any D&O insurance because he feels that
if the company stumbles so stupidly because of poor governance that he along [Warren Buffet appears]
with all of his boards should suffer the resulting personal bankruptcies that
would follow with all the lawsuits that would be piled on and yes sometimes
companies are so corrupt or stupid or unlucky that the damages in a lost
lawsuit exceed the value of the entire company itself and then the insurance
company has to be called to cover whatever is left in legal bills after
the company has been handed over in practice it's not quite that dramatic
companies carry D&O insurance for smaller things as well like a company
stock goes from $22 to $14 after a bad quarter and some ambulance-chasing [Company stock graph appears]
lawyer from New York is able to convince a judge that proper disclosure wasn't
made about the lack of sales in the Uzbekistan office and to make the
lawsuit go away the company held hostage pays seventeen million dollars in
damages to shareholders making a claim the key thing is the shareholders here
get like pennies a share and the lawyers get millions a typical D&O policy for a
smaller public company might carry a ten million dollar deductible so in this
case the first ten million of that seventeen comes out of the company
coffers and then the money beyond that comes from the insurance company that
wrote the coverage policy well historically the business of writing D&O
policies has been a great business for the insurance industry as tons of
premiums get paid by nervous Nelly directors who in fact never lose [Hammer nails sign to the wall]
lawsuits and well you know the gravy train keeps on graving... [Man riding a gravy train]
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