Derivative lawsuits give corporate shareholders a platform to bring claims, on behalf of the corporation, against the corporation’s directors and officers for a wide range of alleged misconduct subject to specific procedural requirements. Shareholder plaintiffs often allege financial or reputational damage to the corporation because the directors or officers (D&Os) breach their fiduciary duties to the company.

Among other theories, plaintiffs in these cases may assert that corporate defendants wasted corporate assets, engaged in self-dealing, or failed to oversee the company’s operations adequately.

Until recently, the duty to monitor corporate operations had been viewed as a duty of the directors whom the law vests with the power to dictate the corporation’s affairs. This year, however, the Delaware Court of Chancery clarified that corporate officers likewise have the same duty to monitor and thus also may face derivative breach of fiduciary duty claims for failing to carry out their oversight obligations.

In the past, derivative lawsuit settlements focused on the remediation of corporate governance and other non-monetary corrective measures. It is still typical for corporate governance reforms to be agreed upon in derivative settlements; however, particularly in the past decade, derivative settlements have involved increasingly large monetary components – millions, and sometimes even hundreds of millions, of dollars.

Because derivative lawsuits are brought on behalf of the corporation as the allegedly aggrieved party, settlement or judgment proceeds generally are due to the corporation itself. Accordingly, the law generally forbids the circular result of corporations indemnifying the D&Os who are required to pay (or cause to be paid) such derivative settlement proceeds to the corporation. Indeed, many state statutes, including in Delaware, expressly prohibit a company from indemnifying D&Os for a derivative lawsuit settlement or judgment (as opposed to defense costs, which are generally indemnifiable).

Given the non-indemnifiable nature of what are often substantial monetary settlements in derivative lawsuits, Side A D&O insurance—which provides first-dollar coverage to D&Os for non-indemnifiable loss—can be critical for protecting individual D&Os’ personal assets when derivative lawsuit settlements are negotiated and ultimately funded. Without Side A coverage, D&Os may have to pay derivative settlements or judgments out of pocket.

Consult with your Aon broker for any questions regarding the application of Side A D&O insurance.

All descriptions, summaries or highlights of coverage are for general informational purposes only and do not amend, alter or modify the actual terms or conditions of any insurance policy. Coverage is governed only by the terms and conditions of the relevant policy.