directors' and officers' liability insurance

Case Study Although unusual, a company's directors are sometimes held personally liable for misconduct even when the firm carries directors' and officer's liability insurance. In 2006 and 2007 five outside directors of bankrupt shoe retailer Just for Feet paid $41.5 million to settle a lawsuit brought by a court-appointed trustee charged with recovering money for creditors. A 2001 Alabama lawsuit had charged the directors with conflict of interest and breach of fiduciary duty. Although directors' and officers' insurance generally provides coverage for these types of judgments, the firm's officers had pleaded guilty and subsequently consumed nearly all the firm's liability insurance coverage in settling an earlier class action lawsuit filed by shareholders. Only $100,000 in coverage remained for the outside directors. It was unclear whether a third-party source, such as an employer, covered the settlement by the outside directors. For example, companies can purchase special liability insurance designed to protect and benefit individuals as opposed to the business entity. Coverage would have been more likely if the directors' employers had encouraged them to serve on the board of Just for Feet.