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Copyright Delaware Law School of Widener University, Inc. 1987

Delaware Journal of Corporate Law

ARTICLE: OUTSIDE DIRECTORS: THEIR IMPORTANCE TO THE CORPORATION AND PROTECTION FROM LIABILITY.

FALL, 1987

12 Del. J. Corp. L. 25

Author

BY DONALD E. PEASE *

Excerpt

I. INTRODUCTION

Directors of corporations have never been more at risk -- at least that is their perception -- than they are today. 1 Their exposure extends not only to the loss of their personal fortunes in class and derivative actions, but also to fines, penalties, and punitive damages and, in rare cases, even to imprisonment for violations of state and federal laws. 2

In the past directors believed they were protected from liability by the directors and officer (D&O) liability insurance carried by the companies on whose boards they served. Although the many limitations or exclusions in D&O policies justifiably caused some to question their value, 3 nonetheless D&O insurance was purchased to attract and retain qualified outside directors. Owing to recent heavy losses and uncertainty as to their liability, the number of carriers of D&O liability insurance has been significantly reduced. 4 Moreover, the remaining insurers do not favor coverage for corporations in businesses such as finance, high technology, utilities, real estate, petrochemicals, and steel. In some cases carriers have cancelled the insurance. In other cases the premiums have been increased to such high rates that the insureds have not renewed their coverage. 5

Without insurance, directors must rely on indemnification as provided in state statutes, charters, and bylaws. Although indemnification may well provide more protection than insurance, directors have never felt that indemnification protected them adequately. Under the General Corporation Law of Delaware (DGCL), directors and officers may not be indemnified for judgments or ...
 
 
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