CPCU 552 Test #2 (Ch. 7-8) Questions and Answers Graded A+

CPCU 552 Test #2 (Ch. 7-8) Questions and Answers Graded A+ Describe the major functions of a corporation's board of directors. - Answers • 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. - Answers • 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. - Answers • 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. - Answers • 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. - Answers 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. - Answers • 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. - Answers • 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? - Answers • 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 What is covered by Coverage B of a D&O liability policy? - Answers • insures corporation for amounts it is lawfully permitted or required to pay to defend or settle claims against D&Os • if a director is held liable for a loss caused by a covered wrongful act and the corporation is lawfully able to indemnify the director, the loss will be paid under Coverage B What is covered by entity coverage (Coverage C) of a D&O liability policy? - Answers makes the corporation itself (the entity) an insured for claims made against it because of wrongful acts covered by the policy Without entity coverage, to what extent is the corporation insured under a D&O liability policy? - Answers only covers corporation for indemnification of its directors and officers -- does not cover any loss attributable to the entity's wrongful acts Based on their definition of "claim" to what extent do some D&O policies cover criminal proceedings against D&Os? - Answers • 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? - Answers 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. - Answers • making errors in corporation's financial statements • claims alleging mismanagement What variations can apply to extended reporting provisions (tail coverage) in D&O policies? - Answers • 30-60 day automatic tail coverage • option to add 1-5 years of coverage after automatic tail