Liability insurers as corporate monitors

Corporate directors and officers are being personally sued with increasing frequency for a broad array of alleged offenses, ranging from breach of the commonlaw duty of loyalty to shareholders, to violations of federal securities laws, to “looting” the corporate treasury, to violations of federal security laws, to even the “failure to exercise reasonable care in the selection of a depository bank.“’ According to one report, such suits increased fourfold from 1984 to 1985 alone.2 Although this rate of increase has apparently moderated, the liability of corporate officials remains controversial.3 Most public corporations have responded by purchasing directors’ and officers’ liability insurance (“liability insurance”), which covers the expenses of individual directors and officers as well as the corporation’s expenses incurred under indemnification agreements. Proponents of liability insurance point out that it reduces the cost of compensating risk-averse directors and officers and encourages