ShmoopTube

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finance a la shmoop what is directors and officers insurance coverage? well if

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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]

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feeling you'll sleep better at night if you have it. D&O insurance is just

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insurance like any other kind of insurance only it insurers for board

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stupidity or rather legal definitions of dumb things companies do that costs

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shareholders money and for which the Board of Directors then gets blamed and

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sued in theory if company ever lost a large lawsuit well at worst they would [Man and woman in a court]

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just hand over the keys to the company itself to whoever won the lawsuit

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famously warren buffett founder and CEO Berkshire Hathaway and the largest

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seller of insurance in the world through Geico and other subsidiaries does not

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allow his Board of Directors to carry any D&O insurance because he feels that

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if the company stumbles so stupidly because of poor governance that he along [Warren Buffet appears]

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with all of his boards should suffer the resulting personal bankruptcies that

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would follow with all the lawsuits that would be piled on and yes sometimes

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companies are so corrupt or stupid or unlucky that the damages in a lost

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lawsuit exceed the value of the entire company itself and then the insurance

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company has to be called to cover whatever is left in legal bills after

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the company has been handed over in practice it's not quite that dramatic

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companies carry D&O insurance for smaller things as well like a company

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stock goes from $22 to $14 after a bad quarter and some ambulance-chasing [Company stock graph appears]

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lawyer from New York is able to convince a judge that proper disclosure wasn't

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made about the lack of sales in the Uzbekistan office and to make the

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lawsuit go away the company held hostage pays seventeen million dollars in

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damages to shareholders making a claim the key thing is the shareholders here

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get like pennies a share and the lawyers get millions a typical D&O policy for a

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smaller public company might carry a ten million dollar deductible so in this

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case the first ten million of that seventeen comes out of the company

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coffers and then the money beyond that comes from the insurance company that

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wrote the coverage policy well historically the business of writing D&O

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policies has been a great business for the insurance industry as tons of

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premiums get paid by nervous Nelly directors who in fact never lose [Hammer nails sign to the wall]

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lawsuits and well you know the gravy train keeps on graving... [Man riding a gravy train]

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