20. What other protections exist for directors acting in their official capacity?
Directors (and officers) of corporations often have a layer of protection from personal liability beyond the business judgment rule. Many corporations purchase “director and officer insurance” (D&O insurance) that provides the corporation (and possibly the director or officer) with indemnification for liability for actions or decisions made in its official capacity. D&O insurance generally only applies to breaches of the duty of care. The irony of this situation is that shareholder funds are used to purchase insurance protecting officers and directors from personal liability to shareholders.
• Note: Public policy and state statutes often limit indemnification of officers who breach the duty of the loyalty to the corporation.
• Discussion: How do you feel about the ability of a corporation to purchase insurance to indemnify it against liability caused by the actions of directors or officers? Does it matter to you that the insurance may indemnify the director or officer from personal liability? Why or why not? Does it affect your opinion knowing that the premiums for the insurance are paid by corporate funds (which belong to shareholders)? Why or why not?
• Practice Question: Harold is CEO of ABC Corp. He makes personal loans to family members from corporate funds. The company sustains a loss when the borrowers default on the loans. Shareholders are angered by this and seek a derivative action against Harold. The corporation purchased director and officer insurance to cover Harold’s activities as CEO. Will this protect Harold from potential liability? Why or why not?