What Went Wrong with Directors' and Officers' Liability Insurance?

Abstract

Corporate boards are widely perceived as having experienced a severe liability insurance crisis. After several years of expanding coverage and falling prices, starting in late 1984- the market for directors' and officers' (D&O) liability insurance changed dramatically: premiums skyrocketed, deductibles increased, and coverage was reduced. There are reports of directors resigning because their firms had lost insurance coverage and of individuals declining invitations to serve on boards in increasing numbers. In accord with the reported anecdotes is a reversal of a two-decade trend in board composition, as the proportion of outside directors, individuals not employed by the corporation, decreased. Management's perception of an insurance problem is further evident in the shift in reasons firms provide for not carrying D&O insurance. In 1984, the most frequently stated reason for not purchasing such insurance was that there was no need for it, whereas in 1987 the main reason was affordability.