Directors’ & Officers’ Liability, D&O Insurance and Moral Hazard: More Control of Moral Hazard by D&O Insurers Needed to Increase the Incentives of Directors and Supervisory Board Members

Abstract:

Directors & Officers (D&O) liability insurance offers directors and supervisory board members ample protection against directors' and officers' liability. Due to the presence of D&O insurance, however, there are fewer financial incentives vis-à-vis directors and officers to act with due care - the moral hazard. D&O insurers can take various measures in an attempt to mitigate the moral hazard. Field research shows, however, that the moral hazard is being insufficiently addressed by D&O insurers in the Netherlands. This most likely also holds true for D&O insurers in other European countries and in the United States. It is, however, necessary to ensure that the moral hazard is optimally addressed and that the incentives for careful acts of management from liability law continue to be retained as much as possible. That is why it is desirable for D&O insurers to start implementing a retention for the Side A coverage for (the liability of) directors and officers.