D&O insurance policy contracts: A proposal for process-based non-rescindability

In the typical case, whether a D&O insurance contract can be rescinded as to a particular insured individual will depend on what knowledge that individual possessed with respect to relevant information that was not disclosed on the D&O insurance application. This focus on knowledge - really, lack of knowledge - creates a misalignment of incentives that is suboptimal from the perspective both of D&O insurance carriers and society. Instead of focusing on the knowledge of directors and officers at the time that a company applies for D&O insurance, insurance carriers should focus on the process by which their corporate clients are governed. D&O insurance carriers could reward companies that follow best practices for corporate governance by writing D&O insurance contracts that would be non-rescindable so long as the insureds followed prescribed, carefully articulated and verifiable good corporate governance practices. Such as process-oriented approach to underwriting D&O liability will likely decrease corporate malfeasance and hence the risk of liability claims being brought against a corporation and its directors and officers. The resulting reduction in the rate of claims should lead to a reduction in the cost of D&O insurance for these well-governed companies.