Predicting Corporate Governance Risk: Evidence from the Directors' and Officers' Liability Insurance Market

58 Pages Posted: 19 Jun 2006 Last revised: 26 Mar 2008

Tom Baker

University of Pennsylvania Law School

Sean J. Griffith

Fordham University School of Law

Abstract

This Article examines how liability insurers transmit and transform the content of corporate and securities law. D&O liability insurers are the financiers of shareholder litigation in the American legal system, paying on behalf of the corporation and its directors and officers when shareholders sue. The ability of the law to deter corporate actors thus depends upon the insurance intermediary. How, then, do insurers transmit and transform the content of corporate and securities law in underwriting D&O coverage? In this Article, we report the results of an empirical study of the D&O underwriting process. Drawing upon in-depth interviews with underwriters, actuaries, brokers, lawyers, and corporate risk managers, we find that insurers seek to price D&O policies according to the risk posed by each prospective insured and that underwriters focus on corporate governance in assessing risk. Our findings have important implications for several open issues in corporate and securities law. First, individual risk-rating may preserve the deterrence function of corporate and securities law by forcing worse-governed firms to pay higher D&O premiums than better-governed firms. Second, the importance of corporate governance in D&O underwriting provides evidence that the merits do matter in corporate and securities litigation. And third, our findings suggest that what matters in corporate governance are deep governance variables such as culture and character, rather than the formal governance structures that are typically studied. In addition, by joining the theoretical insights of economic analysis to sociological research methods, this Article provides a model for a new form of corporate and securities law scholarship that is both theoretically informed and empirically grounded.

Keywords: corporate governance, insurance, securities, empirical research, qualitative research

JEL Classification: G30, K13, K22

Suggested Citation

Baker, Tom and Griffith, Sean J., Predicting Corporate Governance Risk: Evidence from the Directors' and Officers' Liability Insurance Market. Chicago Law Review, Vol. 74, p. 487, 2007. Available at SSRN: https://ssrn.com/abstract=909346

Tom Baker (Contact Author)

University of Pennsylvania Law School ( email )

3501 Sansom Street
Philadelphia, PA 19104
United States
215-746-2185 (Phone)

HOME PAGE: http://www.law.upenn.edu/cf/faculty/thbaker/

Sean J. Griffith

Fordham University School of Law ( email )

150 West 62nd Street
New York, NY 10023
United States

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