In the United States, articles of association often include an indemnification provision holding the officers harmless for losses occurring due to their role in the company.
Liabilities which aren't indemnified by the corporation are potentially covered by certain types of D&O insurance (particularly Side-A Broad Form DIC policies).
[6] The 1995 decision of the Ninth Circuit in Nordstrom, Inc. v. Chubb & Son, Inc. resulted in the emphasis in Side C (corporate entity) coverage.
These insuring clauses are termed Side-A, or "non-indemnified"; Side-B, or "indemnified"; and Side-C, or "entity securities coverage".
[12] Other claims arise from shareholder-derivative actions, creditors (particularly after entering the zone of insolvency), customers, regulators (including those that would bring civil and criminal charges), and competitors (for anti-trust or unfair trade practice allegations).
[12] For private companies, claims are often from competitors or customers for antitrust or deceptive business practices[13] and one survey of 451 executives found that lawsuits cost an average of $308,475.
[14][15] One relatively neglected area is the personal liability to non-shareholders that directors may face due to torts committed as a result of negligent supervision.
Directors and officers insurance is provided so that competent professionals can serve as supervisors of organizations without fear of personal financial loss.
However, insuring negligence in supervising organizations, or wrongful acts and misrepresentation in financial statements is controversial due to its effect on accountability, otherwise known as the moral hazard problem.
In the famous[20] case of Smith v. Van Gorkom (1985), the Delaware Supreme Court found a board grossly negligent and therefore liable.
The decision created a backlash and a statute change in Delaware which allowed a corporation to amend its charter to eliminate directors' personal liability for violation of the duty of care; a version of this statute has been passed in all states, and most large corporations have such an "exculpatory clause".
[21] One empirical study found that increased D&O insurance is associated with reduced shareholder benefits from mergers and acquisitions.
[24] Notably, however, this statement overlooks the holding-company structure of Berkshire Hathaway, auxiliary indemnification agreements with Buffett, and the individual operating companies may still purchase such insurance.
[25] The leaders in the provision of directors and officers liability insurance include Axa XL, AIG, Chubb Limited, Tokio Marine HCC, The Travelers Companies, CNA Financial, Berkshire Hathaway, and Sompo Group via Sompo Japan Nipponkoa Insurance, among many others.