CPCU 552 TEST #2 (CH. 7-8) QUESTIONS + ANSWERS
Describe the major functions of a corporation's board of directors. - Answer -• establish
corporate policy
• make major business and financial decisions
• appoint executive officers to manage daily operations
Describe the 4 fiduciary duties of the directors and officers of a corporation. - Answer -•
duty of care (with care that a person in a similar position would reasonably believe
appropriate under similar circumstances)
• duty of obedience (to the law - perform duties according to applicable statutes and
terms of corporate charter)
• duty of loyalty (best interest of corporation)
• duty of disclosure (must disclose material facts to all persons who have a right to know
them and wouldn't otherwise be able to obtain them)
Compare derivative and non derivative suits. - Answer -• derivative - brought by
shareholders in name of the corporation; damages go to corporation
• nonderivative - not made in name of corporation; may be initiated by customers,
competitors, employees, other people outside corporation
Describe a typical basis for class action lawsuits against directors and officers of a
corporation and provide an example of a common allegation. - Answer -• wrongful acts
related to securities
• corporation's public statements contained material misrepresentations or omission
• alleged misrepresentation artificially inflated corporation's stock price
• insiders profitably sold their personal holding in stock while inflated
Discuss why corporations might settle claims against their directors and officers even if
they believe they have defenses to the claims. - Answer -defense costs and the amount
of time required to prepare an adequate defense can be devastating
Discuss how settlement of claims against a corporation's directors and officers can
present problems for indemnification of the directors and officers. - Answer -•
indemnification under common law required successful defense against suit
• when it is settled, it is terminated with no determination of wrongdoing
• not clear whether the directors and officers are entitled to indemnification
Discuss the reasons that risk control should be a central part of the management of
directors and officers (D&O) loss exposures. - Answer -• claims against D&Os can
create significant defense settlement costs
• D&O liability insurance cannot restore a corporation's reputation
• loss of reputation can damage customer relationships, hinder access to capital
markets, and make it difficult to attract highly qualified executives
, What is covered by Coverage A of a D&O liability policy? - Answer -• insures individual
directors and officers
• indemnifies corporation's D&Os for covered claims only when it is NOT required by
law, is NOT permitted by law, or is financially prohibited b/c lacks of funds or bankruptcy
• limited to losses the corporation does not or cannot provide indemnification to the
D&Os
Based on their definition of "claim" to what extent do some D&O policies cover criminal
proceedings against D&Os? - Answer -• some include criminal proceedings
• coverage is limited to defense costs b/c public policy bars insurers from covering
criminal penalties
D&O liability policies normally define "loss" to include defense costs. How does this
definition of loss affect the application of D&O policy limits? - Answer -limits of liability
apply to the sum of damages and defense costs combined
Give 2 examples of problems posed by D&O liability loss exposures that are better
handled under claims-made rather than occurrence-based policies. - Answer -• making
errors in corporation's financial statements
• claims alleging mismanagement
What variations can apply to extended reporting provisions (tail coverage) in D&O
policies? - Answer -• 30-60 day automatic tail coverage
• option to add 1-5 years of coverage after automatic tail
• possible separate limit of liability may exist for tail coverage
Explain prior acts coverage and the warranty to which it is subject in D&O policies. -
Answer -• covers claims made during the policy period for wrongful acts that occurred
either during the policy period or at any time before the policy period
• subject to a warranty that none of the D&Os knew of any circumstances that might
result in a claim
Describe the discovery provision of some D&O policies for wrongful acts that occur after
the policy period. - Answer -many provide that if the insured becomes aware of a
wrongful act that is reasonably expected to result in a covered claim and provides
written information on the act to the insurer during the policy period, then any
subsequent claim arising out of that wrongful act will be covered
Explain the general definition of insureds under Coverage A of D&O policies. - Answer -
• individual directors and officers - includes persons who were, now are, or shall
become duly elected or appointed directors or offices of the insured corporation
• in the event of the death, incapacity, or bankruptcy of an insured, coverage is usually
provided for any claim against his or her estate, heirs, legal representatives, or assigns
Describe the major functions of a corporation's board of directors. - Answer -• establish
corporate policy
• make major business and financial decisions
• appoint executive officers to manage daily operations
Describe the 4 fiduciary duties of the directors and officers of a corporation. - Answer -•
duty of care (with care that a person in a similar position would reasonably believe
appropriate under similar circumstances)
• duty of obedience (to the law - perform duties according to applicable statutes and
terms of corporate charter)
• duty of loyalty (best interest of corporation)
• duty of disclosure (must disclose material facts to all persons who have a right to know
them and wouldn't otherwise be able to obtain them)
Compare derivative and non derivative suits. - Answer -• derivative - brought by
shareholders in name of the corporation; damages go to corporation
• nonderivative - not made in name of corporation; may be initiated by customers,
competitors, employees, other people outside corporation
Describe a typical basis for class action lawsuits against directors and officers of a
corporation and provide an example of a common allegation. - Answer -• wrongful acts
related to securities
• corporation's public statements contained material misrepresentations or omission
• alleged misrepresentation artificially inflated corporation's stock price
• insiders profitably sold their personal holding in stock while inflated
Discuss why corporations might settle claims against their directors and officers even if
they believe they have defenses to the claims. - Answer -defense costs and the amount
of time required to prepare an adequate defense can be devastating
Discuss how settlement of claims against a corporation's directors and officers can
present problems for indemnification of the directors and officers. - Answer -•
indemnification under common law required successful defense against suit
• when it is settled, it is terminated with no determination of wrongdoing
• not clear whether the directors and officers are entitled to indemnification
Discuss the reasons that risk control should be a central part of the management of
directors and officers (D&O) loss exposures. - Answer -• claims against D&Os can
create significant defense settlement costs
• D&O liability insurance cannot restore a corporation's reputation
• loss of reputation can damage customer relationships, hinder access to capital
markets, and make it difficult to attract highly qualified executives
, What is covered by Coverage A of a D&O liability policy? - Answer -• insures individual
directors and officers
• indemnifies corporation's D&Os for covered claims only when it is NOT required by
law, is NOT permitted by law, or is financially prohibited b/c lacks of funds or bankruptcy
• limited to losses the corporation does not or cannot provide indemnification to the
D&Os
Based on their definition of "claim" to what extent do some D&O policies cover criminal
proceedings against D&Os? - Answer -• some include criminal proceedings
• coverage is limited to defense costs b/c public policy bars insurers from covering
criminal penalties
D&O liability policies normally define "loss" to include defense costs. How does this
definition of loss affect the application of D&O policy limits? - Answer -limits of liability
apply to the sum of damages and defense costs combined
Give 2 examples of problems posed by D&O liability loss exposures that are better
handled under claims-made rather than occurrence-based policies. - Answer -• making
errors in corporation's financial statements
• claims alleging mismanagement
What variations can apply to extended reporting provisions (tail coverage) in D&O
policies? - Answer -• 30-60 day automatic tail coverage
• option to add 1-5 years of coverage after automatic tail
• possible separate limit of liability may exist for tail coverage
Explain prior acts coverage and the warranty to which it is subject in D&O policies. -
Answer -• covers claims made during the policy period for wrongful acts that occurred
either during the policy period or at any time before the policy period
• subject to a warranty that none of the D&Os knew of any circumstances that might
result in a claim
Describe the discovery provision of some D&O policies for wrongful acts that occur after
the policy period. - Answer -many provide that if the insured becomes aware of a
wrongful act that is reasonably expected to result in a covered claim and provides
written information on the act to the insurer during the policy period, then any
subsequent claim arising out of that wrongful act will be covered
Explain the general definition of insureds under Coverage A of D&O policies. - Answer -
• individual directors and officers - includes persons who were, now are, or shall
become duly elected or appointed directors or offices of the insured corporation
• in the event of the death, incapacity, or bankruptcy of an insured, coverage is usually
provided for any claim against his or her estate, heirs, legal representatives, or assigns
