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directors' and officers' liability insurance

directors' and officers' liability insurance definition - business

directors' and officers' liability insurance

A type of insurance taken to protect a firm's directors and officers against lawsuits—mainly suits instituted by unhappy shareholders of the firm. Directors' and officers' liability insurance became very expensive and difficult to obtain during the late 1990s and early 2000s as the number of shareholder lawsuits increased dramatically. Companies find it very difficult to recruit outside directors unless the candidates are supplied with liability insurance. Also called D&O coverage.
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.

The American Heritage® Dictionary of Business Terms Copyright © 2009 by Houghton Mifflin Harcourt Publishing Company. Published by Houghton Mifflin Harcourt Publishing Company. All rights reserved.

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