I cannot emphasize enough the high volume and, what's more important, the high quality of faculty publications that continue to cross my desk. Two that have rested there since September are the subject of this grateful and congratulatory note. Each is a collaboration between our own Tom Baker and the lost but never forgotten Sean Griffith, now (alas) of the Fordham Faculty. The Lennon and McCartney parallel will be immediately clear.
As you all know, what has long characterized Tom's work is an inspired refusal to write simply about the law OF insurance. It might be too glib to describe him as the first law AND insurance scholar, but his insight is that important. Typical approaches to insurance scholarship treat the underlying substantive law as a given. So if there is tort law that gives rise to liability for medical malpractice, or even auto accidents, the insurance scholar accepts the underlying liability rules and writes about the way the insurance market operates in reaction to the substantive law. There's plenty to write about here, since the insurance market can react in many ways, and it's worth figuring out how to optimize regulation of the industry. It seems self-evident, however, that sooner or later we should pause to focus on the inevitable feedback loop. How, for example, does the creation of a vibrant insurance market effect the goals that lie behind the substantive law which led to the creation of the insurance market in the first instance. So, more concretely, if doctors routinely have medical malpractice insurance that operates in certain ways, how does this insurance further or deter, if at all, the compensation and deterrence goals of tort liability for medical mistakes. See Tom Baker, The Medical Malpractice Myth (U.Chicago 2005). Or, if plaintiffs' lawyers seldom press their lawsuits beyond the level of insurance policy limits, what effect does this have on how tort law functions. See Tom Baker, Blood Money, New Money and the Moral Economy of Tort Law in Action, 35 Law and Society Review 275 (2001). See generally, Insurance as Tort Regulation: Six Ways that Liability Insurance Shapes Tort Law in Tort and Liability Insurance, Gerhard Wagner, ed. (European Centre for Tort and Insurance Law 2005).
Such an agenda is challenging enough when you teach not only insurance law but also the underlying substantive law, as Tom teaches torts. But suppose your agenda is broader and you wish to tackle, let's say, the question of how Directors and Officers Insurance might further or deter the goals of the underlying corporate law that creates liability for directors, officers, and (in a matter of terminological confusion that might have pleased Lewis Caroll) the corporate entity itself. Wouldn't it be great if you could find a collaborator who specializes in corporate law.? Better still if he's smart, charming, and fetches $400 for breafast for 4 at the Quaker Diner during the PILG auction. Enter Sean.
Our two good friends have published two penetrating and suitably well-placed analyses of this surprisingly neglected topic. Virtually all major corporations purchase Directors and Officers insurance to protect both the individuals who serve as Directors and Officers as well as the shareholders who would suffer from lawsuits that might drain the corporate fisc. This insurance typically reduces or even eliminates the risk to the policy's beneficiaries created as a result of liability that might result from fraud or other corporate governance failures. Accordingly, one would expect insurance companies who issue such Directors and Officers policies to have substantial incentive to protect their own bottom lines by attempting to reduce the number of incidents in which the issuers would have to pay claims on the policies and to increase the premiums received from policyholders in situations where a payout was more likely. Tom and Sean sought to discover whether empirical reality matched such basic intuitions. To do so, they conducted more than 40 interviews with insurance underwriters, insurance actuaries (the longstanding distinction between the underwriter and the actuary is beyond the scope of this note), insurance brokers, risk managers within companies who buy insurance, lawyers who advise on insurance, and claims managers. They also attended six conferences for D&O professionals (twice serving as moderators).
In their first article, Predicting Corporate Governance Risk: Evidence from the Directors' & Officers' Liability and Insurance Market, 74 University of Chicago Law Review 487 (2007) they tackle the question of underwriting and premium setting (choosing clients and pricing policies for those non-insurance folks among us). Here, to make a long, well-told, and complex story very short, Tom and Sean demonstrate that insurance companies do indeed look hard at the corporate governance practices and financial health of the companies they insure. One interesting finding is that insurance companies tend to focus perhaps even more on soft criteria such as the culture and character of a corporation and its executives than they do on actual formal governance policies adopted by the Boards of the insured companies. In this case then, the D&O market seems to operate in tandem with the underlying corporate and securities law. To avoid higher D&O premiums or even rejection as possible clients, corporate boards have an incentive to take steps to build companies that will have reduced risk of liability from class action suits - precisely the goals sought by the laws that authorize such suits in the first place.
The results of Tom and Sean's second article, The Missing Monitor in Corporate Governance: The Directors" & Officers Liability Insurer, 95 Georgetown Law Journal 1795 (2007) are far less sanguine. Once an insurance company has priced and sold a D&O policy, there would be every reason to expect the insurance company to work with the insured to reduce the risk of liability. For example, workers' compensation insurers routinely work with their customers to improve workplace safety so as to reduce injuries and thus reduce claims. One would expect then that D&O insurers would closely with Boards to improve corporate governance practices. It turns out, however, that they don't. Tom and Sean attribute this to "agency costs," a very fancy way of saying that since the officers and directors are the ones in charge of purchasing D&O insurance, we wouldn't expect them to be thrilled about an insurance company that wanted to meddle in their affairs. But whatever the reason, their results are quite conclusive. Monitoring of client behavior is much less common in this area than in other sections of the insurance market. As Tom and Sean explain, this means that the insurance itermediary at this stage is doing a very poor job of imposing incentives for the insured corporations to take the kinds of action that our underlying substantive law prohibiting fraud, etc. is designed to accomplish. If we want securities laws to deter fraud, we need to think much harder about how the existence of D&O insurance serves virtually to immunize Directors, Officers and Shareholders from losses that class actions might produce.
Each of these articles makes a substantial contribution to an important area of law that affects our entire economy. As you know from Tom's fine presentation this fall, a third co-authored article arising from Tom's and Sean's interviews with participants in the D&O market remains in the works. We all look forward to its publication. In the meantime, CONGRATULATIONS TOM. (Congratulations to you too Sean although I fear Bill Treanor will have his own kind words.)