The Deep Water Horizon disaster is seeping into nearly every corner of the Gulf Coast ecosystem and economy. Most of the blame has been placed on BP, now faced with the prospect of significant liability and litigation expenses, including at least three Shareholder Derivative Lawsuits known to date filed against BP directors and officers.

The shareholders complaints are similar. They all assert that BP directors and officers should have taken safety concerns and warning signs more seriously. They seek recovery against the BP defendants for “breach of fiduciary duty and corporate waste.” (Herman, Herman, & Grimm, 2010)

The BP scenario is a prime example of the critical need for D&O coverage. Without D&O insurance, very few people are likely even to serve on a board in this day and age. As adept as an individual may be there is still a risk.

“No entity is exempt,” says Scott Meyer, executive vice president, ACE Professional Risk, “Increasing numbers of lawsuits have been filed against private companies and charitable organizations as well. Any person who is considering a position as a director or officer of a company or charity needs to be certain D&O coverage is in place. Otherwise, they could be facing a situation where their personal assets are at stake.” (Pillsbury, 2010)

Part of the problem is that the breadth of fiduciary duty of officers and directors has grown. It used to be just the duty of loyalty and duty of care; now there is a duty of oversight. Any shareholder of a corporation has the right to bring suit against a D&O if they think the company has not acted in the best interest of the corporation. The insurance is not so much for liability but to cover the cost of litigation. Even though most corporate charters provide for indemnification for officers and directors, they often don’t have the funds for massive litigation and may not cover if the directors or officers are found wanting.

A carrier takes a claim, defends it and pays the cost of the defense. Defense can be costly– thousands and thousands of dollars, even millions, so costly that the insurance is what often keeps a company afloat.

There are three types of D&O coverage:

  • Side A: Directly insures directors and officers for defense costs, settlements and judgments, not indemnified by the corporation.
  • Side B: Reimburses the company indemnification payments made to its directors and officers
  • Side C: Covers the company for its own liability, such as securities law claims

All coverages are included in a typical D&O insurance policy and directors and officers share this policy. “If the company’s indemnification obligations, or its separate liability, deplete the limits of insurance under the Side B and Side C coverages, the limits for individual directors and officers may be eroded, in some cases to nothing.” (Meyer, Zacharia, & Lavigne, 2010)

Because of the litigiousness of this country it has become a necessity to have insurance. Well-meaning officers and directors face a growing multiplicity of obligations and regulations that it becomes near to impossible to avoid crossing a line—even unintentionally—or, in any event, to prevent lawsuits with limited merit requiring a costly defense .

Learn more about D&O insurance by taking CEU’s online Directors and Officers Liability course.

Editors, F. (2010, August). The Deepwater Spill: Coverage Analysis . Claims .
Herman, H., Herman, T., & Grimm, M. (2010, August). Director And Officer Insurance And The Gulf Oil Spill. Retrieved August 26, 2010, from http://www.clausen.com: http://www.clausen.com/index.cfm/fa/firm_pub.article/article/1abaff03-46ad-4092-a974-7ce99b7bab0a/Director_And_Officer_Insurance_And_The_Gulf_Oil_Spill.cfm
Meyer, S., Zacharia, C. A., & Lavigne, K. (2010). Financial Crisis: Bankruptcy Implications for D&O Insurance. the ACE Group.
Pillsbury, D. (2010, August). The ABCs of D&O. Rough Notes .