Why Purchasing D&O Insurance Is No Longer Enough

The media is rife with references to high-profile corporate scandals. Although the fate of those responsible for corporate misconduct is well publicized, the innocent corporate officials impacted by such scandals are rarely mentioned. In an effort to protect directors and officers, corporations allocate significant capital to buying directors' and officers' ("D&O") liability insurance. However, in today's environment of increasing numbers of corporate scandals, even innocent directors and officers sometimes find themselves stripped of the very protection such policies are meant to afford by insurance companies seeking to avoid large exposures. Allegations of corporate fraud have lead insurance companies to invoke exclusionary provisions and increasingly to seek the remedy of rescission. Although procuring D&O insurance coverage reflects a corporation's realization of and appreciation for the risk faced by directors and officers, corporations must ensure that the policies they purchase actually provide the protection sought. This article examines recent trends in court decisions regarding D&O insurance in cases of corporate fraud and suggests methods by which corporations can attempt to maximize the protection provided by their D&O policies, particularly for innocent corporate officials.