Directors' and Officers' Liability Insurance: Probable Directions in Texas Law

Article excerpt

Introduction

Directors and officers of business corporations1 and other entities, including universities,2 churches,3 and foundations,4 can be liable for financial injuries they cause while working as directors or officers. They may be sued by: (1) the corporation itself or the corporation's trustee in bankruptcy;5 (2) other successors to the corporation, including government entities like the Resolution Trust Corporation, the Federal Savings and Loan Insurance Corporation, the Federal Home Loan Bank Board, or the Federal Deposit Insurance Corporation;6 (3) shareholders in shareholder derivative actions;7 (4) creditors of the corporation;8 or (5) other corporations suing in the context of contested takeovers or other-sometimes unusualsituations.9 Governments occasionally use criminal laws to attack the conduct of directors and officers.10

Liability insurance is available to cover some of these judgments. Often it is known as "directors' and officers' insurance," or "D&O insurance."11 This Article discusses some significant parameters of D&O liability, expounds on some of the ways typical D&O insurance contracts work, and explores the law governing this type of insurance. Some attention is paid to the current law in Texas. This Article does not discuss general principles of D&O underwriting, principles of D&O risk control, or the process of dealing with D&O claims.12

It is becoming fashionable to refer to D&O insurance as a form of "executive liability insurance."13 One leading D&O carrier has titled one of its package policies the "Executive Protection Policy," and that policy includes D&O insurance.14 Executive liability insurance is a broader concept than D&O insurance and includes employment practices liability insurance, fiduciary liability insurance (which is basically designed to take care of liability exposures under the Employee Retirement Income Security Act (ERISA), kidnap/ransom insurance, and specialized executive insurance.15

Executive liability insurance, and D&O insurance in particular, must be distinguished from financial institution bonds and fidelity coverage.16 Fidelity bonds and insurance are designed to cover losses caused by dishonesty and fraud, usually committed by employees, nearemployees, and trusted independent contractors. In contrast, director's and officer's insurance is not designed to cover risks arising from moral turpitude or a want of integrity.17 Indeed, as this Article explains, there is a dishonesty exclusion included in standard D&O policies. To a considerable degree, D&O insurance generally purports to cover good faith errors and omissions, as well as negligence in business contexts.

There is very little Texas law specifically devoted to the subject of D&O insurance. Also, there are far fewer reported cases about the subject throughout the country than about most other types of insurance contracts. As this Article will discuss, several reasons explain this state of the law. First, there are fewer D&O policies than comprehensive general liability, homeowner, or vehicle policies. Second, many D&O policies contain arbitration clauses, thereby avoiding trials and published opinions. Third, D&O policies are structured in such a way that few "long-tail" claims are asserted under them, i.e., there are hardly any claims in which the plaintiff asserts he was injured many years earlier, as is common, for example, in asbestos cases.

The Texas Supreme Court has provided guidance on D&O insurance issues by announcing that it is state policy for insurance jurisprudence in Texas to be as consistent as possible with other American states: "Courts usually strive for uniformity in construing insurance provisions, especially where, as here, the contract provisions at issue are identical across the jurisdictions."18 The reason for this policy is clear. Business is conducted on a national basis and thus business law needs to be relatively uniform. …