Changing Guards: Improving Corporate Governance with D&O Insurer Rotations

66 Pages Posted: 4 Sep 2020 Last revised: 17 Sep 2020

See all articles by Andrew Verstein

Andrew Verstein

University of California, Los Angeles (UCLA) - School of Law

Date Written: July 25, 2020

Abstract

Almost all public companies buy insurance for their directors and officers. D&O insurers should be active gatekeepers for the corporation, since they lose money if executives misbehave, but all available evidence suggests the opposite: insurers protect executives from liability for bad management and they encourage wasteful settlement of even meritless lawsuits. This Article diagnoses the failure of D&O insurance as a form of pernicious relational contracting. Insurers ignore even the worst corporate governance because they can recoup losses in the years to come. This recognition unlocks a potential solution: mandatory rotation. If insurers had only a few years to recoup any losses, they would seek to limit those losses by serving as an active gatekeeper.

Keywords: Insurance; Corporate; Governance: Directors; Officers; D&O; Auditor; Audit Partner; Rotation; Risk; Monitoring; Gatekeeper; Gatekeepers

Suggested Citation

Verstein, Andrew, Changing Guards: Improving Corporate Governance with D&O Insurer Rotations (July 25, 2020). UCLA School of Law, Law-Econ Research Paper No. 20-06, Available at SSRN: https://ssrn.com/abstract=3660571 or http://dx.doi.org/10.2139/ssrn.3660571

Andrew Verstein (Contact Author)

University of California, Los Angeles (UCLA) - School of Law ( email )

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