Column 1 shows the results from an ordinary least squares (OLS) regression of loanspreads on excess D&O insurance coverage, defined as the residual coverage amount (in dollars) scaled by the average market value of equity in the year. The residual coverage amount is obtained from a D&O insurance coverage prediction model similar to that in Core (1997), in which the dependent variable is the log policy limit and the explanatory variables include log market value of equity, leverage, cash holdings, profitability, Herfindahl Index, and indicator variables for US listing, board independence, and having a prior divestiture. We also include industry and year fixed effects in the insurance coverage prediction model. Column 2 shows the results from an OLS regression of loanspreads on the D&O insurance coverage, controlling for insurance premiums as an additional governance control. Column 3 shows the results from an OLS regression of loanspreads on excess D&O insurance coverage (defined above) and excess insurance price. We follow the approach in Chalmers, Dann, and Harford (2002) and Core (2000) to estimate the excess insurance price (premium) as the residual from the model that regresses insurance premiums on excess coverage and all variables used in the excess coverage model scaled by the amount of coverage. Column 4 shows the results from an OLS regression of loanspreads on D&O insurance coverage ratio excluding loan facilities originated in National Bureau of Economic Research recession years (i.e., 2001 and 2008 in our sample period). Column 5 controls for the effect of economy-wide credit spreads, defined as the yield on (US) AAA-rated corporate bonds minus the three-month London Interbank Offered Rate (LIBOR) (both measured at the loan origination date). Column 6 shows the results from a firm fixed effects regression. Column 7 shows the second-stage coefficients from regressing loanspreads on instruments
If during the period of insurance we develop a standard endorsement providing enhancements of coverage to our base Directors and OfficersLiabilityInsurance policy in the country where the policyholder is domiciled (as indicated in the schedule) and such endorsement is to be made available to our clients in such country for no additional premium, then the policyholder shall have the right to the benefit of, but not the obligation to accept, such new coverage enhancement endorsement, subject to all underwriting information or particulars as we may require, from the date of such availability.
To identify the causal effect, I set up an experiment using the introduction the shareholder class action law in Korea and the purchase of directors’ and officers’ liabilityinsurance (D&O insurance) by Korean companies. Korean data provide a unique opportunity to run a natural experiment with one group of firms experiencing exposure to a higher risk of litigation and other groups remaining in status quo during the process of a corporate law change. The Korean gov- ernment decided to allow shareholder class action for public firms having assets over 2 trillion Korean Won 1 (henceforth KRW) from 2005 and extend this to all publicly listed firms from 2007. Shareholder class action allowed even minority shareholders to instigate litigation against the firm in which they had invested or against its board of directors, unlike the earlier share- holder derivative suit, which allowed only significantly large shareholders to institute litigation proceedings. Also, a court ruling in one case could now be applicable to all shareholders expe- riencing the same type of damage, unlike earlier, when each aggrieved shareholder had to raise individual lawsuits to be compensated for identical incidences. Therefore, the introduction of shareholder class action law implied a clear exogenous increase in risk of shareholder litigation as well as litigation costs for firms subject to the law. Companies can cover this legal risk to some
While director and officer (“D&O”) liabilityinsurance is important for any company, the importance of D&O insurance increases exponentially for both public and private companies (the “Corporation”) when the Corporation is insolvent or involved in a financial restructuring. When a Corporation is economically viable, a directors and officersliabilityinsurance policy (hereinafter, a “D&O Policy”) is generally used to advance defense costs, indemnify judgments, and pay for settlements (collectively, the “Losses”) with respect to claims against the directors and officers after the policy’s self-insured retention (which works like a deductible) (hereinafter, the “Retention”) is satisfied. However, when a Corporation files for bankruptcy, the D&O policy becomes one of the few protections a director or officer has against lawsuits and claims targeting his or her personal assets. Many of these lawsuits and claims stem from alleged violations of the 1934 Securities and Exchange Act (the “Securities Claims”) or the Employee Retirement Income Security Act of 1974 (“ERISA”). 1 In bankruptcy, D&O Policies need to be as comprehensive as possible to protect the Corporation’s directors and officers in the event claims are asserted against them.
We examine the effects of directors' and officers' liabilityinsurance (hereafter referred to as "D&O insurance") on corporate risk taking behavior and firm value. D&O insurance covers corporate directors and officers against claims arising from their activities as representatives of the firm. Being covered by D&O insurance and how much is covered can affect the incentives of directors and managers, and these incentives can in turn affect corporate decision makings. Recent studies that examine the effects of D&O insurance on corporate behavior primarily focus on the agency cost perspective, such as increasing the opportunistic behavior of directors and officers, from being covered by the insurance (Chalmers et al., 2002; Lin et al., 2011; Chen et al., 2012). This study examines another important role of D&O insurance: altering the general risk attitudes of officers and directors. Without D&O insurance, directors and officers can become overly averse to taking risks due to fears of litigation. Since D&O insurance insulates their liabilities from such litigation, we conjecture that D&O insurance can mitigate the problem of excessive risk-averseness in corporate investment. To verify our hypothesis, we exploit an ideal period of time in Korea during which firms were required to disclose their D&O information and there was also a significant divide between firms that were covered by D&O insurance and firms that were not covered by the insurance. We find evidence that D&O insurance offers directors and officers the incentive to invest in riskier assets and further find that firm value is higher for these firms relative to firms that do not have D&O insurance. We also discover that these results are especially pronounced for high-growth firms, suggesting that the increased risk-taking effect of D&O insurance works to mitigate the underinvestment problem in risky, yet value-adding projects. Our results are robust to various treatments for the potential endogeneity of D&O insurance usage with respect to firm risk and firm value.
his paper investigates the effect of directors and officersliabilityinsurance (D&O liabilityinsurance) on audit effort of auditors. D&O Liabilityinsurance is a liabilityinsurance payable to top executives of a company as indemnification for losses or litigation costs from the lawsuits, and companies carry D&O liabilityinsurance for protecting their directors and officers from the lawsuits. Therefore, D&O liabilityinsurance is a safeguard to cover the monetary damage from litigation risks. However, carrying D&O liabilityinsurance causes that managers become less risk averse. They are also less likely to reject attractive new risky projects with D&O liabilityinsurance (Core, 1997). Moreover, in the case of abusing the insurance, managers may take more risks and exhibit more opportunism than managers without D&O liabilityinsurance. Previous studies provide evidence that managers of companies with D&O liabilityinsurance have more opportunity to engage in earnings management (Narjess, Nabil, and Martin, 2008). Also, in general, earnings management is more likely to occur in insured corporations than in uninsured corporations. In this circumstance, auditors may consider whether their clients are insured or uninsured as useful information for estimating clients’ audit risks. If auditors use the information of D&O liabilityinsurance for considering that insured companies have higher potential litigation risk than uninsured companies, there is a positive association between D&O liabilityinsurance and audit effort. To test the association, we uses audit hours and audit fees as proxies for audit effort.
Our sample initially comprised all firms listed on the SHSE and SZSE from 2009-2014, and the initial sample was treated as following: 1) Eliminate the listed companies of the financial insurance industry because they are generally the insurance provider. There- fore, they are likely to be the provider of D&O insurance and the demand side at the same time, which has significant difference in the motivation of purchasing. 2) Elimi- nate ST, PT companies, because they are specially monitored by the supervision de- partment so that they cannot properly reflect the general situation of listed companies in the capital market. 3) Eliminate the sample whose data is missing or blank. 4) As for the influence of extreme value in the data, this paper, at the same time, on the basis of manual processing, carried the continuous variable between 1% and 99%, Winsorize treatment was conducted on the quantile. After the sample processing, 10,736 groups of observed values were obtained, 962 set of which had bought D&O insurance. The data on D&O insurance are manually collected from annual reports and disclosed minutes of boards’ and shareholders’ meetings, as the China’s Securities and Regulatory Com- mission(CSRC) requires that any purchase of D&O insurance should be proposed by the board of directors and approved at shareholders’ meetings. The financial data used in this study are obtained from China Stock Market Accounting Research (CSMAR) system and Wind database. We use Stata 13.0 to process and analyze the data.
• to mitigate any adverse effect on such Insured Person’s reputation by disseminating findings which exonerates the Insured Person from fault, liability or culpability in connection with a Claim covered by this policy, but only if such findings are made by a court with jurisdiction to finally dispose of that Claim [including the outcome of any appeal in connection with that Claim].
• Environmental Mismanagement claims extension, including coverage for climate change and global warming disclosure claims, restricts the pollution exclusion so that it does not apply to traditional management liability exposures such as securities claims, retaliation claims against insured persons and all Side A coverage claims of any nature.
Towers and Perrin (2012), firms have reacted to the growing number of claims by increasing their total insurance coverages at D&O program renewals. The whole marketplace for the insurance has been put into a state of transition, as evidenced by higher pricing experienced in many sectors. According to Lin, Officer, Wang and Zou (2013), the Canadian system for handling securities class action lawsuits is similar to that in the US to a large extent. They point out that the liability risk to corporate directors and officers often comes from shareholder litigation or lawsuits brought by other parties such as creditors and regulators. According to Chalmers, Dann and Harford (2002), directors and officers consider D&O insurance to be crucial in Canada as it is in the US. For example, in Canada the costs of settlement or judgment in derivative suits are typically covered by a D&O insurance policy. However, there are some important differences between the governance systems in Canada and the US that can have an effect on whether D&O insurance protection is beneficial for the corporate shareholders or not. According to Gouiaa and Zéghal (2013), Canadian firms operate within a socio-economic environment which has many distinguishing features that can influence both the governance practices and the financing costs. In Canada firms use a specific governance system which includes strong legal and extra-legal institutions aimed at protecting investors. It is characterized by a principle-based governance approach.
Similarly, the results in Panel C (using asset turnover as the operating performance measure) suggest that operating performance worsens for firms with high D&O insurance coverage after acquisitions and improves for acquirers with low coverage. However, the pre-to-post differences in the last row of Panel C are insignificantly different from zero at conventional levels. We test for changes in abnormal operating performance in a more rigorous fashion in Table 11. We use regressions similar to those in Healy, Palepu, and Ruback (1992), where post-merger three-year median abnormal operating performance (ROA or ATO) is regressed on the combined (acquirer and target) industry-adjusted performance in year -1. 23 Industry classification is based on three- digit SIC codes, but the results are insensitive to the use of four-digit SIC codes. Low- and high- coverage are as defined in Table 10. The slope coefficient on pre-acquisition performance captures the correlation in abnormal performance between the pre- and post-merger years. Following Harford et al. (2010), we also include controls for the size and market-to-book of acquirer, the attitude of the deal, and whether the target and acquirer are in the same industry. The intercept measures the average change in the industry-adjusted abnormal performance that is due to the merger, and is our main coefficient of interest.
D&Os are risk-averse because they cannot fully diversify risks specific to their claims in a firm (Smith and Stulz, 1985) and risks associated with their human capital (Amihud and Lev, 1981). The possibility of bearing legal liabilities in shareholder litigations against bad outcomes of their decisions can make D&Os even more risk-averse (Core, 1997). Consistent with this view, there is evidence that the Sarbanes-Oxley Act reduces corporate risk-taking as it increases legal liabilities of D&Os (Bargeron et al., 2010). D&O insurance effectively limits D&Os’ legal liabilities in lawsuits against bad outcomes of their business decisions. Thus, with the protection offered by D&O insurance, D&Os are encouraged to invest in risky projects otherwise passed up (Core, 1997; Baker and Griffith, 2010).
From a policy standpoint, there are various interpretations for the use of directors’ and officers’ liabilityinsurance. One interpretation is that manag- ers use insurance to bolster their ability to exploit inside information for personal advantage. A second, but not mutually exclusive, interpretation is that managers use insurance to protect themselves and corporate assets from opportunistic lawsuits. Although further research on the information con- tained in a firm’s choice of its D&O coverage limit is warranted, our evi- dence implies that the former interpretation is likely to play a role in insurance purchases. Our confidence in this interpretation is bolstered by evidence from Yermack ~ 1997 ! and Aboody and Kasznik ~ 2000 ! in the context of ex- ecutive stock option plans. Because the information about the issuance of stock options is commonly not released until the annual proxy discloses changes in option plans, there exist situations where opportunistic managers can utilize their superior information to increase their wealth by inf luencing the terms of soon-to-be-issued executive stock options. Yermack and Aboody and Kasznik find evidence of opportunistic behavior. There are three common elements to these situations where managerial opportunism appears to oc- cur: ~ a ! private information exists, ~ b ! managers have incentives to exploit their informational advantages, and ~ c ! disclosure is either not timely or nonexistent. In the context of D&O insurance, it would seem that if mana- gerial opportunism has an impact on the directors’ and officers’ insurance decision, then the merit of mandatory disclosure of directors’ and officers’ liabilityinsurance should be studied further. We note that some countries, such as Canada, have chosen to require full disclosure of these decisions.
Code permits firms to eliminate monetary liability of directors to the corporation and its shareholders for damages ensuing from acts of gross negligence. 17 The amendment’s appeal to freedom of contract helped to broadly quell the aftermath of the Delaware Supreme Court decision in Smith v. Van Gorkom, 18 which found the defendant directors grossly negligent and thus in breach of their duty of care. Concerns about this decision included the precipitous escalation of insurance costs for directors and fears that individuals qualified to serve as directors would otherwise exit the market, 19 making everyone worse off. For these kinds of reasons, the new provision permitted further degradation of the already low common law standard directors owed to shareholders and the corporation (that of gross negligence). One informing idea was that corporations and shareholders should be able to choose the foundation of their relationship, with freedom of contract as an established, albeit contested, value or rationale. 20 Though shareholders stand to lose by virtue of reduced director accountability on the duty of care front (including the risk of shirking), these risks are presumably offset by gains, including access to a strong pool of individuals willing to serve and the increased opportunity for “desirable entrepreneurial decision making.” 21
It is important for church and charity leaders to have a clear understanding of the risks associated with their ministries and programs, the potential personal liability they face as board members and the duty of care required they owe as a fiduciary or trustee.
Another potential issue arises because practice with the insurance and relevant jurisprudence is limited in Korea. However, in the U.S., a number of cases about D&O insurance have been accumulated and discussed. Therefore, it is proposed that American solutions to the issues arising in D&O insurance be applied in the Korean system. Among other things, in order to avoid legal disputes in this area, Korean D&O policy needs to clarify the scope of claims, the advancement of defense costs and the standards of allocation. 439 Moreover, in light of protecting the insured’s interest, the scope of the insured v. insured exclusion needs to be limited. However, much time is necessary for such reform of current statutes and policies, 440 and thus Korean regulatory institutions first need to improve their guidelines.
(i) you have no knowledge of any claims or circumstances which may give rise to a claim under the policy, nor of any disciplinary proceedings or any complaints having been threatened, intimated or made (successfully or otherwise) against the Directors or Officers or the Company or the employees or you in respect of the legal liabilities or loss to which Part 3 of this Addendum relates
D&O insurance contracts stipulate a premium to be paid, a policy limit as well as a deductible. A particular feature of D&O insurance contracts is that it is written on a claim made and reported basis, similarly to most professional liabilityinsurance contracts. In contrast with occur- rence contracts, claims-made contracts cover the policyholder for claims that are reported during the policy year, no matter when the loss was incurred in the past, subject to a retrospective date before which losses are not covered. 3 Occurrence contracts cover the policyholder for losses that are incurred during the policy year, no matter when the claim is reported in the future. According to Doherty (1992), this diﬀerence in the two types of contracts is due to the increased uncertainty in the liability rules. A consequence of the so-called liability crisis in professional liabilityinsurance of the late 70s and early 80s (especially medical malpractice insurance) induced insurers to create organizations and contracts whereby part of the liability-rule risk was passed on the policyholder. Doherty concludes that the emergence of mutual insurers and claims made contracts can be di- rectly attributed to this liability rule uncertainty. Building upon Doherty (1992), Boyer and Gobert (2002) assert that claims-made policies can also be used to separate good risks from bad risks, risk averse agents from risk neutral agents and to smooth individual consumption over time.
There is generally no deductible for coverage afforded to insured individuals under a non- profit D&O policy. However, as is the case in private-sector policies, there are generally deductibles for coverage afforded to the NPO itself, both its own separate coverage and for the NPO’s obligation to reimburse its directors and officers. The good news for NPOs is that deductibles or retentions in non-profit policies tend to be much lower than those in policies catering to for-profit organizations. Deductible amounts can be as low as $1000, and in some cases insurers are even prepared to underwrite the policy without any deductibles. This is quite different than in the for-profit situation discussed in question seven of the Briefing.