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University of Pennsylvania Law Review

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This Article explores the connection between corporate governance and directors’ and officers’ (D&O) insurance. It argues that D&O insurers act as gatekeepers and guarantors of corporate governance, screening and pricing corporate governance risks to maintain the profitability of their risk pools. As a result, in a well-working insurance market, D&O insurance premiums would convey the insurer's assessment of a firm's governance quality. Simply stated, firms with better corporate governance would pay relatively low D&O premiums, while firms with worse corporate governance would pay more. This simple relationship could signal important information to investors and other capital market participants. Unfortunately, the signal is not being sent. Corporations lack the incentive to disclose this information on their own initiative, and U.S. securities regulators do not require registrants to do so. This Article therefore advocates a change to U.S. securities regulation, making mandatory the disclosure of D&O policy details--specifically, premiums, limits, and retentions under each type of coverage, as well as the identity of the insurer.