Chapter

The Puzzle of Entity-Level D&O Coverage

in Ensuring Corporate Misconduct

Published by University of Chicago Press

Published in print January 2011 | ISBN: 9780226035154
Published online March 2013 | e-ISBN: 9780226035079 | DOI: http://dx.doi.org/10.7208/chicago/9780226035079.003.0005
The Puzzle of Entity-Level D&O Coverage

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This chapter investigates why firms purchase Directors' and Officers' liability (D&O) insurance for corporate identity even though the entity-level coverage appears to be a negative net present-value transaction. It analyzes the agency cost explanation for the purchase of entity-level coverage, arguing that this coverage transfers a great deal of the corporation's liability risk to a third-party insurer and diminishes the deterrent effect of shareholder litigation. The chapter also contends that entity-level coverage produces greater moral hazard that traditional corporate property and casualty insurance.

Keywords: D&O insurance; corporate identity; entity-level coverage; agency cost explanation; liability risk; third-party insurer; shareholder litigation; moral hazard

Chapter.  7711 words. 

Subjects: Company and Commercial Law

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