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: How does a board of directors f...27 Views
Finance a la Shmoop! How does a board of directors function?
All right, well structurally, the Board of Directors has really one function, after
it is elected by a vote, of the common shareholders, of the company. The board of
recruits, then hires the CEO and that's not necessarily easy. Because, most
of the good CEOs, you actually want, are already ensconced in high-paying jobs, [man being offered money]
from which they have to be bought away. Picking the right CEO, is the big
roulette wheel bet, the board makes. Is the CEO good, or bad, or ugly and yeah the
CEO can be all three. After being hired the CEO then hires everyone else, more or
less. In a public company, the board divides into committees, to advise and
oversee many of the little processes. There's audit committee people and
nomination and government committee people and Compensation Committee people.
In large companies there are also, often subcommittees, that focus on narrow
things, like technology, or politics and lobbying and, or the environment. You know, if [oil drill with man and duck]
you work for a big polluter. Well another big element of board value-add, revolves
around, strategy. Are we the high cost, high value company, or are we the low cost,
Walmart desk provider? That is, are we Pirates of the Caribbean, or are we La La
Land? What other strategic issues are we fighting? How do we get into China and [world map]
Russia and get out of Somalia? So yeah, that's strategy. How does the
board cover its primary obligations, in providing a fiduciary duty, to the
shareholders, who elected them? Is the board governing fairly and equitably?
Yeah, how do they do that? Well they just basically pay attention, right? Are
company policies racist, or gender biased, or ageist?
Which is illegal everywhere, except Silicon Valley in Hollywood. Are all the [director and actress]
right controls inspected, like audit, hiring, firing, policies and our
companies casual Fridays, have they gotten to just to casual? Is that a board item?
Yah, alright, next meeting. So yeah, that's the gist, hire the CEO, form
committees and of course they're also in charge of bagel Thursdays. [man in panda suit, bagels falling from sky]
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