Why bosses insure themselves against their own decisions

This insurance carries a rather dry name, directors' and officers' insurance, often known by its initials. It is one of the strangest contracts in the whole universe of insurance, and one of the most misunderstood. It is tempting to imagine it as a privilege of the wealthy, one more golden parachute for powerful people already well protected. That is a misreading. This insurance is in fact the discreet cog that makes modern capitalism possible, because it insures something nothing else insures, the fact that leading is in itself dangerous. Without it, no reasonable, non-wealthy person would accept the personal liability that comes with running a company, and it is precisely that liability this issue wants to look in the face.

Here is the thesis. Most insurance covers things that happen to you, a fire, a theft, an illness, an accident. Directors' insurance covers something you do, the act of deciding. It insures your own judgment against the risk of being found at fault. This makes it philosophically singular and economically essential, because without it the personal liability attached to power would be so frightening that no one would wish to wield it. This insurance is not a privilege, it is the mechanism that makes the modern separation between those who own a company and those who run it livable, the thing that lets a person agree to be held personally responsible for decisions that could ruin them.

The net beneath the tightrope of power

To understand what it answers, we must look at the architecture of a modern company. The owners, the shareholders, entrust to managers the task of deciding on their behalf. When those decisions go wrong, the law allows shareholders, but also regulators, employees, creditors, to pursue those managers personally, exposing their own estate. Faced with such a risk, a rational person would simply refuse the post. Directors' insurance steps in exactly here, the company takes out a contract that covers the defense costs and settlements when its leaders are sued for their conduct in office. It is a net strung beneath the tightrope of power, without which no one would dare walk the rope.

But this net has holes, and those holes are the essential part. Directors' insurance covers errors of judgment, not deliberate fraud or personal enrichment, which are excluded. It insures the honest decision that turned out badly, not dishonesty. This dividing line between the good-faith mistake and the intentional wrong is the permanent battlefield of the contract, because courts and insurers constantly argue over which side a given act falls on. There the true nature of the coverage is decided, it protects the one who erred while trying honestly, not the one who cheated. And in its purest form, the coverage known as Side A protects the individual directly when the company can no longer indemnify them, for instance in insolvency, the leader's final personal parachute when everything else has given way.

This architecture reads in three sides that make clear where the money really goes. The first protects the individual when the company cannot indemnify them, it is the leader's bare parachute. The second reimburses the company when it has itself indemnified its leaders, as the law or its bylaws allow. The third covers the company itself for certain claims aimed directly at it. This gradation says something important, the coverage is not a single block but a carefully ordered stack, where even the case of the vanished company has been foreseen, leaving the lone director to face their judges. It is in this last, most stripped-down case that directors' insurance shows its true function, holding the person upright when the institution has collapsed.

One must understand why the law tolerates, and even encourages, this protection. Most legal systems recognize a rule of prudence, often called the business judgment rule, which protects the leader who decided in good faith, in an informed way and without conflict of interest, even if the decision turned out disastrous. The idea is that one cannot judge a decision by its outcome alone, on pain of punishing bad luck as much as fault and deterring all risk-taking. Directors' insurance extends this logic of the law, it insures what the law already agrees to excuse, the honest mistake, and refuses to cover what the law condemns, fraud. Far from being an anomaly, the coverage is therefore the insurance mirror of an old legal principle, the one that distinguishes erring from wrongdoing.

The net has another limit, less known but heavy with meaning. In many legal systems, one cannot insure against one's own criminal fines or against certain regulatory penalties, because it would be contrary to public policy to be able to buy in advance the erasure of one's punishment. Directors' insurance covers defense costs and civil settlements, but it stops where the penalty society inflicts to punish begins. This limit confirms the overall logic, one can insure the mistake, never the fault the law means to sanction in the very person of the wrongdoer. The contract thus follows, even in its exclusions, the moral border between erring and transgressing, and it is this fidelity to a moral line that keeps the insurance from becoming a license to act without consequence.

Courage or recklessness

Here arises the paradox that makes the subject come alive. Does insuring decisions produce courage or recklessness. One reading sees in it the condition of good risk-taking. Leading demands bold decisions under uncertainty, and if every wrong choice could personally destroy the one who made it, leaders would freeze, flee all risk, refuse innovation. Directors' insurance lets competent people decide firmly, and by covering defense costs it also protects the innocent leader from the ruin a baseless lawsuit would bring. It buys courage where fear would produce paralysis.

The opposite reading is more anxious. Shielding decision-makers from the consequences of their decisions is the very definition of moral hazard, the risk that a protection encourages the behavior it insures. If the ruinous cost of a bad decision is removed, is that decision made with the same care. The coverage could thus blunt accountability, the very thing meant to keep power honest. To this tension is added a systemic dimension, the price and availability of this insurance swing sharply with litigation trends, so that the cost of being a leader rises and falls with the mood of the courts. In hard markets, even the most upright leaders struggle to get covered, and the boldness one wished to protect suddenly becomes unaffordable. The deepest tension lies there, society wants its leaders both bold and accountable, and this insurance buys the boldness by softening the accountability, an unavoidable trade-off at the heart of corporate power.

This trade-off is made more unstable still by a shift in litigation, the event-driven lawsuit. The pattern has become familiar, an event occurs, a cyberattack, a product defect, an environmental or social scandal, the share price falls, and in its wake shareholders sue the leaders, faulting them for failing to foresee or disclose the risk. The initial harm, whatever it is, then almost mechanically doubles into a suit against the people who decided. Every new type of risk, by becoming a matter of public attention, thus becomes a new ground for pursuing directors, endlessly widening the perimeter of what must be insured against. Directors' insurance finds itself chasing a target that swells with each crisis, and its price follows the chase.

The shifting price of leading

This last point deserves a pause, because it links this insurance to a wider phenomenon. Directors' premiums went through years of surge, driven by the multiplication of shareholder class actions and by litigation triggered by the slightest event, a share-price drop, a cyberattack, a scandal. Then they eased when capacity returned to the market. This swing of the pendulum reveals an uncomfortable truth, the cost of leading is not fixed, it breathes to the rhythm of society's litigiousness. The more a society sues its leaders, the dearer it becomes to insure them, and so the riskier and costlier it becomes to agree to lead, to the point where the pool of people willing to take the responsibility could shrink to the wealthiest, those who can absorb the risk without a net.

We have seen this pendulum swing recently. Around 2019 to 2021, the directors' insurance market went through a marked hardening, driven by a multiplication of shareholder class actions and a flood of stock-market listings ripe for litigation, premiums climbing sharply and capacity growing scarce, to the point where some companies struggled to find a taker. Then, from 2022, competition returned and rates eased almost as fast as they had risen. This rapid cycle shows that the cost of leading can double and then recede within a few years without the competence of leaders changing one iota, purely at the whim of insurers' appetite and the mood of the courts. The price of courage, in short, is set on a market as volatile as any other.

One then realizes that this insurance is not a technical detail, it is a barometer of the relationship a society keeps with its leading elites. When distrust rises and lawsuits multiply, the price of the net climbs, and leading gradually becomes again what it was before this coverage was invented, a personal gamble reserved for those who can afford to lose. The democratization of access to leadership positions, the idea that a talented but unmoneyed executive could run a large company, rests in part on the discreet existence of this contract.

The hidden condition of power

Directors' insurance reveals a silent truth about power, one can only persuade someone to accept great responsibility by protecting them from part of its weight. The contract bosses take out against their own decisions is the hidden condition for anyone to agree to decide at all. We want accountable leaders, yet we dimly know that total responsibility, with no net, would find no takers, so we invented the net and prefer not to think about it too much. The insurance is the quiet compromise between two things we want and cannot fully have at once, leaders who answer for everything and leaders who are willing to serve at all.

Yet the field of what a leader can be held personally responsible for keeps widening, to cyber governance now imposed by law, to climate disclosures, soon to decisions entrusted to artificial intelligences. The web of grounds for a lawsuit spreads, and this insurance stretches to follow it. The question that opens is how far that stretching can go, at what point the risk of leading becomes so vast that no contract can absorb it any longer, and where leading becomes again, as in the past, a personal gamble one wins or loses alone. On that day, the question will no longer be how to get insured, but who will still agree to decide.