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The Puzzle of Entity-Level D&O Coverage

The Puzzle of Entity-Level D&O Coverage

Chapter:
(p.57) Chapter Four The Puzzle of Entity-Level D&O Coverage
Source:
Ensuring Corporate Misconduct
Publisher:
University of Chicago Press
DOI:10.7208/chicago/9780226035079.003.0005

This chapter investigates why firms purchase Directors' and Officers' liability (D&O) insurance for corporate identity even though the entity-level coverage appears to be a negative net present-value transaction. It analyzes the agency cost explanation for the purchase of entity-level coverage, arguing that this coverage transfers a great deal of the corporation's liability risk to a third-party insurer and diminishes the deterrent effect of shareholder litigation. The chapter also contends that entity-level coverage produces greater moral hazard that traditional corporate property and casualty insurance.

Keywords:   D&O insurance, corporate identity, entity-level coverage, agency cost explanation, liability risk, third-party insurer, shareholder litigation, moral hazard

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