D&O Litigation on The Rise

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:

  • $38 million verdict against directors and officers of a company accused of fraud, breach of contract and unjust enrichment.
  • $2.4 million verdict for an executive who claimed that his company breached his employment contract by refusing to redeem his interest in the business when he resigned.
  • $2 million settlement against former directors and officers of a company who misdirected funds during liquidation and closing of the company.
  • $20 million judgment against directors and officers of a bank accused of conspiracy, negligence and breach of contact.

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:

  • Dishonest, criminal or fraudulent conduct
  • ERISA (Employee Retirement Insurance Savings Act) claims involving breach of duty involving employee pension plans
  • Prior acts of fraud
  • Fines
  • Penalties
  • Punitive damages
  • A duty to defend (many policies only reimburse for 'reasonable' defense costs)

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.