D&O insurance policy contracts: A proposal for process-based non-rescindability

Author: Huskins, Priya Cherian

Source: International Journal of Disclosure and Governance, Volume 3, Number 2, 1 June 2006 , pp. 99-106(8)

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Abstract:

In the typical case, whether a D&O insurance contract can be rescinded as to a particular insured individual will depend on what knowledge that individual possessed with respect to relevant information that was not disclosed on the D&O insurance application. This focus on knowledge — really, lack of knowledge — creates a misalignment of incentives that is suboptimal from the perspective both of D&O insurance carriers and society. Instead of focusing on the knowledge of directors and officers at the time that a company applies for D&O insurance, insurance carriers should focus on the process by which their corporate clients are governed. D&O insurance carriers could reward companies that follow best practices for corporate governance by writing D&O insurance contracts that would be non-rescindable so long as the insureds followed prescribed, carefully articulated and verifiable good corporate governance practices. Such as process-oriented approach to underwriting D&O liability will likely decrease corporate malfeasance and hence the risk of liability claims being brought against a corporation and its directors and officers. The resulting reduction in the rate of claims should lead to a reduction in the cost of D&O insurance for these well-governed companies.International Journal of Disclosure and Governance (2006) 3, 99-106; doi:10.1057/palgrave.jdg.2040069

Document Type: Research article

DOI: http://dx.doi.org/10.1057/palgrave.jdg.2040069

Affiliations: 1: 1Partner, Woodruff-Sawyer & Co., San Francisco, CA, USA.

Publication date: 2006-06-01