The Best Defense against Class-Action Lawsuits

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Although this scenario is hypothetical, cases like it occur with alarming frequency. There has been a dramatic increase in litigation against corporate board members. In these lawsuits, shareholders allege that board members or corporate officers misled them while disclosing information to the public about a company's future. Since a 1988 Supreme Court ruling made it easier for shareholders to file suit under U.S. securities laws, the number of class-action lawsuits filed each year against companies by their shareholders has doubled.

These lawsuits, disruptive and costly for corporations of all sizes, can destroy smaller companies that don't have the resources to fight. Small to medium-sized firms with share prices that often experience wide swings are a perfect target for class-action suits. With the ever-present risk of litigation looming over boards of directors, companies of all sizes are doing what they can to prepare for the worst.

Though upset about the lawsuit, the chairman is relieved that he purchased directors' and officers' liability insurance six months previously. At least, he thinks, the company's insurer will cover the exorbitant costs of defending the suit and any settlement or judgment costs. To his dismay, when he reads the policy and calls the insurer, the chairman learns that the …