Uncovering a Gatekeeper: Why the SEC Should Mandate Disclosure of Details Concerning Directors’ and Officers’ Liability Insurance Policies

Abstract

This Essay explores the connection between corporate governance and D&O insurance. It argues that D&O insurers act as gatekeepers and guarantors of corporate governance, screening and pricing corporate governance risks to maintain the profitability of their risk pools. As a result, D&O insurance premiums provide the insurer's assessment of a firm's governance quality. Most basically, firms with good corporate governance pay relatively low D&O premiums while firms with worse corporate governance pay more. This simple relationship could signal important information to investors and other capital market participants. Unfortunately, the signal is not being sent. Corporations lack the incentive to produce this disclosure themselves, and U.S. securities regulators do not require registrants to provide this information. This Essay therefore advocates a change to U.S. securities regulation, making disclosure of D&O policy details - specifically premiums, limits and retentions under each type of coverage, as well as the identity of the insurer - mandatory.