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.

Case Studies: The Impact of D&O Litigation and Insurance Coverage

Case Study 1: Enron’s Downfall and D&O Insurance

The Enron scandal of the early 2000s remains one of the most infamous corporate collapses in history. Enron’s directors and officers faced a multitude of lawsuits and legal actions due to their involvement in fraudulent accounting practices and mismanagement.

The D&O insurance coverage played a critical role in providing financial protection to the directors and officers during the extensive litigation process.

This highlights the importance of D&O insurance in safeguarding personal assets in the face of substantial legal challenges.

Case Study 2: WorldCom’s Financial Wrongdoings

WorldCom, a telecommunications giant, faced a similar fate as Enron. The directors and officers of WorldCom were held accountable for orchestrating one of the largest accounting frauds in corporate history.

Shareholders and employees suffered significant financial losses as a result. D&O insurance played a crucial role in mitigating the impact of the lawsuits by providing coverage for legal defense costs and potential settlements or verdicts.

This demonstrates how D&O insurance serves as a financial safety net for directors and officers facing allegations of corporate misconduct.

Case Study 3: The Sarbanes-Oxley Act and Increased D&O Litigation

The passage of the Sarbanes-Oxley Act in 2002 brought about a wave of regulatory changes aimed at improving corporate governance and financial reporting.

The Act imposed stricter rules, fines, and penalties on corporations, increasing the risk of litigation for directors and officers.

This explores real-world examples of D&O litigation that emerged in the aftermath of the Sarbanes-Oxley Act, highlighting how D&O insurance became indispensable in providing financial protection and ensuring access to legal representation for directors and officers navigating this new legal landscape.

Case Study 4: Challenges in Obtaining D&O Coverage

As D&O litigation continues to rise, insurance companies have become more cautious about underwriting D&O policies. This case study delves into the difficulties faced by companies in obtaining D&O insurance coverage.

It explores the reasons behind the increased scrutiny, such as rising settlement and verdict amounts, and highlights the common challenges directors and officers encounter when seeking adequate protection. This sheds light on the evolving landscape of D&O insurance and its impact on corporate risk management.

Case Study 5: D&O Insurance as Asset Protection

Despite the potential drawbacks and challenges associated with D&O insurance, directors and officers, as well as their employers, recognize its significance as a vital form of asset protection.

This examines real-world scenarios where D&O insurance served as a crucial safeguard for personal assets.

It illustrates how D&O coverage provides financial security to directors, officers, shareholders, and employees, serving as an additional means of compensating damages and protecting their interests.