In a perfect world, there would be a central loss fund for anyone to tap into whenever we couldn’t pay our bills. Insurance companies do have a central loss fund run by states, on the off chance they go out of business and will not be able to pay their claims.
All insurance companies in each state pay into the fund, so there will always be money available to pay the claims of policy holders. Meanwhile, state insurance regulators are frequently auditing insurance companies to make sure they have enough in reserves in case there's a catastrophic year with lots of claims.
If the catastrophes exceed the reserves or there is incredible mismanagement resulting in poor investments, the insurance company can tap into the central loss fund. But before they reach that point, they can do a voluntary course of action called a troubled company run-off. The insurance company agrees to stop writing new business, but continues to collect premiums from current customers and pay claims while they are in the process of closing the business. They also can’t decide to change the terms of current policies just because they're in financial trouble.
Even after the Great Recession of 2008, when 100 insurance companies went out of business, the number has never been that high since. Now if there was only a central loss fund for the average Joe…
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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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