Is it possible to get liability insurance for corporate fraud and bad corporate governance?


Despite the Sarbanes-Oxley Act which was introduced in 2002 as a preventive measure against the wide-spreading acts of corporate mismanagement, corporate fraud lawsuits have been on the rise.

It is common for directors or officers of big corporations to be the objects of bad corporate governance claims.

To provide protection against corporate fraud and bad corporate governance claims, some insurance companies now offer liability policies which are specifically designed to indemnify corporate CEOs and CFOs for any financial losses incurred because of corporate liability claims. So, if you are the head of a big corporation and are exposed to the risk of being sued for corporate mismanagement, Directors and Officers liability insurance, also referred to as D&O insurance, is what you need.

How D&O Corporate Liability Insurance Works

Directors and Officers insurance policies are not uniform but there are certain elements that most D&O policies have in common:

  • Coverage A, or Directors and Officers personal liability coverage, comes into force when the corporation is not able to compensate the director or officer responsible for corporate fraud or bad corporate governance. A-side Coverage of a D&O policy promises to indemnify CEOs or CFOs for any damages they have to pay if they are found liable in a corporate mismanagement lawsuit. The only prerequisite for an insurance provider to pay damages on behalf of the insured, is that the definition of "a wrongful act" is fulfilled.
  • Coverage B of a Directors and Officers liability policy, known as Corporate Reimbursement Coverage, comes in when a corporation has a legal obligation to cover the expenses arising out of its director's or officer's liability determined in a corporate mismanagement lawsuit. In such an event, under B-side coverage, the insurance provider agrees to compensate financially the corporation for paying on behalf of its director or officer.
  • Insuring agreement C, called Entity Securities Coverage, is optional. If purchased, it provides legal protection of a corporation in the event that the corporation happens to be the co-defendant in a liability suit because of its director's or officer's wrongful acts.
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