Derivative lawsuits have been in the news more than ever before. With the recent suits and $100 million+ settlements like these making headlines, even non-lawyer and non-insurance civilians have heard the term derivative lawsuit tossed about:

• Dominion Voting Systems and Fox
• McDonald’s and sexual harassment scandal
• Boeing and 737 MAX crashes
• FirstEnergy and bribery scandal
• CBS and Paramount merger

What is this kind of suit, and how does insurance come into play?

Directors and Officers insurance, or D&O, can cover the cost to investigate, defend, and settle derivative lawsuits. Side A coverage of D&O is meant to cover individual directors and officers when a claim is brought against that person(s), alleging the person breached duty to the company. Such claims typically are brought by shareholders alleging inaccurate disclosures, insolvencies, and reporting errors. After a drop in share price, it is not unusual for shareholders to bring a so-called securities suit against directors and officers, and also against the company.

With derivative action, the claim is the same (eg, inaccurate disclosures), but the suit is brought on behalf of the company against directors and officers, rather than on behalf of shareholders. It is thought that the company has suffered the harm. Since shareholders believe the company should have taken its own action, shareholders act in the company’s place, or take derivative control for the company. Any settlement is made to the company, rather than to shareholders.