Research On The Coverage And Exclusions Of Directors And Officers' Liability Insurance

Directors and officers' liability insurance("D&O insurance") is the product of interest imbalance of the management.It means the insurer pays on behalf of the insured directors and officers the loss arising from any claim or claims by the third party by reason of their individual or joint wrongful act,and pays on behalf of the insured corporation the indemnification to the insured person.As a mechanism of interest balance,the D&O insurance plays an important role in corporate governance,and its development is also a process of interest balance.However,this role of interest balance is dependent on the reasonable definition of coverage and exclusions on which I try to make an extensive research.Because the D&O insurance origins in English and American,this paper makes a broad reference to the practices in English and American,and tries to figure out reasonable coverage and exclusions which suit the local environment of China according to the reality in China.The paper has three parts which include the introduction,the main text and the conclusion part.The main text has four chapters.The research background and purpose are briefly described in the introduction.Chapter one of the main text discusses the basic concepts and theory of the D&O insurance,describes its concept,characteristics, operation and implication,and analyzes the relationship between it and other mechanisms for protection of directors and officers,such as the corporate indemnity,the business judgment rule and the limitation and exemption of liability.D&O insurance and such other mechanisms have formed different levels for protection of directors and officers,and they function in different stages in the process of protection and go forward one by one.Then the premise of D&O insurance,i.e.the liabilities of directors and officers,is briefly analyzed in this chapter.The coverage of D&O insurance is discussed in chapter two.There are two parts of a D&O insurance policy,one is to pay on behalf of the insured directors and officers for their liability,and the other is to pay on behalf of the insured corporate for its indemnification to directors and officers.If the policy provides an entity coverage,the insurer will pay on behalf of the corporate the loss it occurs by reason of its own wrongful act.Some typical coverage clauses in different policies are listed,so that the reader can get an intuitive understanding.Then some important items of a policy,such as the insured,wrongful act,claim and loss,are extensively and respectively discussed.In that course,this paper compares the practices in China with the general practices in American,and makes some preliminary analysis.The exclusions of D&O insurance are discussed in chapter three. Where there is an exclusion,it prevails over the general coverage clause. The exclusions fall into two categories,i.e.the mandatory exclusions and the enabling exclusions.The public policy of the former is prevention of moral hazards and insurable interest is required for a policy.The theoretical basis of the latter is the parties' autonomy,and they depend on the insurer's affordability of risk and the ability of policyholders to pay premiums. Dishonesty,breach of the duty of loyalty,punitive damages,fine,penalty and "insured VS.insured" are mandatory exclusions.The enabling exclusions include but not limit to claims insured by other policies, exclusions relating to the nature of the claim-made insurance,particular types of claims and regulatory agency exclusions.Based on the previous analysis,chapter four demonstrates that the D&O insurance is a mechanism of interest balance,and discusses its impacts on corporate governance,civil liability system and litigation.It argues that the D&O insurance will improve the corporate governance and harmonize with the civil liability system by reasonably defining coverage and exclusions.It also argues that a check and balance relationship between D&O insurance and litigation has been formed in China.Then it analyses the status quo of D&O insurance in China and its causes,and holds that the imperfection of the litigation system can explain why D&O insurance has grown so slowly in China.From the perspective of interest balance,the D&O insurance has its own room in China,but it need more time and we should be patient.In the future,what we can do is to improve relevant laws and regulations,especially the shareholder litigations,improve the corporate governance,and define the coverage and exclusions reasonably, so that we can achieve the interest balance between investors and directors and officers.The conclusion part makes a brief summary of this paper.