You buy a vacuum cleaner from Suck Central Ltd. A year after you buy it, the vacuum goes crazy and starts rampaging through your house. Before you finally pull the plug and smack it into submission with a broom, it's destroyed most of your living room and traumatized your dog. You sue. The psychiatrist bills for your dog alone are going to cost tens of thousands of dollars.
Unfortunately, Suck Central went bankrupt six months ago. Apparently, the rampaging vacuums were a serious problem and the company's executives have fled to Paraguay.
So, that's it, right? Company's gone...nothing you can do to collect on your lawsuit, right?
Not quite. Not if the company had runoff insurance. These provisions state that the insurer is still liable for claims made, even after the insurance policy has expired or been canceled. Typically, the runoff provisions have a deadline...some period of time after the end of the policy when they are still in effect (so you can't start making claims decades later.) But they do cover situations where the original company is no longer in operation, whether it's been bought out or has closed down.
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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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What is term life insurance, and variable life insurance? Hit play to find out, and, uh...let's hope you live long enough to figure out the answers.
