Directors' and Officers' Liability Insurance, Independent Director Behavior and Governance Effect

We examine the effect of directors’ and officers’ liability insurance (D&O insurance) on the behavior of independent directors and the effectiveness of their governance role. Using a unique data set, we find a negative relation between D&O insurance and personal board meeting attendance by independent directors and a positive relation between D&O insurance and meeting attendance by authorized representatives. Content analysis of independent director opinion reports indicates that D&O insurance encourages independent directors to behave less responsibly. Insured independent directors are also more likely to be busy. Collectively, D&O insurance reduces the effectiveness of independent directors in corporate governance.