Directors and Officers (D&O) insurance liability policies serve many functions. They provide insurance for negligent acts or omissions committed by directors and officers of a company and also provide shareholders and employees with another means of obtaining damages against those directors and officers when they can't, or don't, pay.
Increased litigation
D&O litigation has significantly increased over the past few years due to the Enron and WorldCom fallouts and the passing of the Sarbanes Oxley Act which places new rules, fines and penalties on corporations. Settlement and verdict amounts have also increased. On top of the multi-million – and even multi-billion – dollar settlements and verdicts involving class action lawsuits against directors and officers of corporations, non-class action lawsuits are also increasing. Here are some recent examples:
Harder to obtain
With insurance companies paying out more for settlements and verdicts, most companies are finding that D&O coverage is harder to obtain. If potential purchasers aren't dissuaded by the high cost, the exclusionary language might just put them over the top. Insurers now seem to exclude more in a D&O policy than they include. On top of large deductibles and co-payments, D&O policies often specifically exclude:
Despite what seems to be many drawbacks, most directors and officers, and/or their employers, carry D&O insurance to protect their personal assets against potential lawsuits.
Good for consumers?
Just as suing someone without car insurance can make auto claims more difficult, so can suing a director or officer of a corporation for a wrongful act if they don't carry D&O insurance or have a significant amount of personal assets. D&O insurance, while primarily purchased to protect directors and officers of a company, may also be good for consumers (in this case – shareholders and employees) as it provides an additional means of paying for damages.