Directors And Officers Liability Insurance (D&O)

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.