Directors and Officers: An Overlooked Exposure?

Edited February 6th, 2024 (Originally created November, 2019, by Kyle Langan)

Case: Elon Musk and Tesla vs. SEC

In August 2018, “Musk tweeted that he had funding secured for a plan to take Tesla private [traded publicly since 2010]. It turned out that was not entirely true — something the SEC objected to, given that Musk was the CEO and chair of a publicly traded company” (Marshall). The agency sued, and penalties included “$20 million fines for both Musk and Tesla, Musk stepping down as chairperson for at least three years (though would remain CEO), and Tesla would have its lawyers ‘pre-approve’ any of its execs’ written communications ‘that contain, or reasonably could contain, information material to the company or its shareholders’” (Marshall). The sanctions uncover unique risks for public companies that require well thought-out loss control and prevention techniques in order to limit exposure to these risks. Although Musk is a genius, he failed one of his primary duties and gravely overlooked the possible repercussions of his statements as a director and officer of Tesla. His failure resulted from inadequate risk management for the loss exposures in the actions and words of an officer at a large public company.

Shannon Tornoe says the “primary duty in the responsibility of managing a company is to always act within the best interest of the company and accurately represent key financials.” Musk’s duty is to protect his company as an officer; showcasing a loud virtual mouth on social media is within the scope of this duty and he is solely responsible for being aware of avoiding this. In addition, Musk faced harsh backlash from the public and numerous lawsuits from investors. The vital takeaway from Musk’s mistakes is the high level of risk when insuring actions of Directors and Officers (D&O). Despite the need to protect against severe litigation, coverage for D&O can easily be overlooked by risk management teams in large public companies because they are not correctly evaluating loss exposures. Executives represent their companies to the public at all times because stocks fluctuate based on what they say. The SEC enforces high control and oversight over publicly traded companies. As a result of this regulation, they can be sued over anything; high risk exposures exist if companies lack cautious and proactive loss control systems with liability policies. D&O exposure is a dynamic risk with the ever-changing landscape of technology, social media and news outlets. Investors in public companies “make decisions based on what key executives say and that information can be shared as quickly as a tweet” (Tornoe). News spreads rapidly and can sometimes be shared in a negative light. To offset this, risk management departments, or the representing brokers must complete proper research of exposures the company may face and practice adequate loss control techniques. Tornoe thinks “Musk failed in his legal duties when [a director/officer] joins the board of a company. Duty of loyalty and duty of care are significant.” Musk did not act within the best interest of Tesla nor did he accurately represent financials. Tesla had loss control measures in place with D&O coverage policies paying for penalties as a result, but proactive loss prevention programs teaching risks of not maintaining accuracy or acting within the best interest of Tesla would have aided their officers significantly. Tornoe also says “accuracy is key. Twitter and other public social media platforms are not casual backyard barbeque talk; if directors and officers are not clear on this fact, they are misunderstanding the responsibility of their roles.” The risks of having everything executives do and say under watch could be a reason a company chooses not to go public. Tornoe’s CCIB policies have proactive loss control/prevention measures in place such as quiet periods for 48 hours until earnings releases (directors and officers have to watch what they say about financials) in order to limit and control the risks of losses.

Case: Quintus, Unify, and Legato vs. SEC

Tornoe’s extensive knowledge of D&O coverage also recalls a 2002 SEC case that brought financial fraud charges against executives at three publicly traded northern California Software Companies: Quintus, Unify, and Legato (n.d.SEC). Some officers were arrested and charged with crimes for materially misrepresenting their companies; bankruptcies and massive lawsuits followed. D&O liability coverages in place defended officers, but proven guilt for any crimes would cease coverage and officers would be uninsured (Severability is key: coverage ends if the officers are proven in court to be crooks. This clause separates the good people from the bad). Many individuals claimed they were owed money, but the policy wording made clear that the company’s insurance for D&O payed settlements to individuals first and the company second. Insurance was vital because it was covering expensive defense cases; this makes the importance of policy wording extremely clear. In the case of disasters, policies need to adapt to pay out settlements in the best way possible. Order of payments in any policy is vital but it is another exposure overlooked by directors and officers in many companies.

Case: Boeing 737 Max jetliner crashes

10.29.18: Lion Air flight crash kills 189 people after takeoff in Indonesia, 3.10.19: Ethiopian Airlines Flight 302 crash kills 157 people shortly after takeoff in Addis Ababa (Chicago Tribune).

Lastly, Tornoe cited catastrophes caused by Boeing crashes and struggles with automatic safety systems pushing planes’ noses down during the 2018 development of 737 models. Two different planes nosedived and killed all on board in both crashes. Lots of controversy ensued over whether or not the officers of Boeing knew anything or not. Lawsuits and scrutiny followed these catastrophes as they always do (ultimately CEO Dennis Muilenburg lost chairman post on 10.14.19) and many questions were asked: Did the CEO know there were clear defects in the aircrafts? How or why did he keep selling the planes? It shows extreme ignorance if he didn’t know and it would be a failure of his primary duty. His head was deservingly on a platter for the public; it is his duty to know better. This case demonstrates the need for key executives to improve and inculcate loss exposure management proactively and intensely. Boeing’s problems resulted from a loose culture that did not put nearly enough stress into managing potential catastrophes.

Interview with Joseph Brennan

For a close look onto the reverse side of Directors and Officers, Joseph Brennan, can provide valuable insight. Mr. Brennan is the Global Chief Risk Officer at Vanguard. “He is responsible for the firm’s current enterprise risk management organization in addition to all facets of enterprise security and investment risk management” (n.d.V). He has been in this role for over a year now, and he is an officer on Vanguard’s Board of Directors. Brennan says this is a position “where your decisions get scrutinized, and risks come with every decision. However, value doesn’t come without taking risk. We cannot manage everything because of so many moving parts, but we are still ultimately responsible.” Large public companies need a culture that will get them almost all the way there. Brennan believes the best method of control over these exposures is great ethics and an enforced culture that limits risky behavior. These exposures occur more often in looser cultures, so that is why ethics should be at the front of directors’ and officers’ minds. Sound operation and compliance with tight procedures also prove critical. Tesla, Quintus, and Boeing – here are your solutions! Set the tone by doing the right thing, then a lower frequency and severity of losses will follow. Litigious people in our world love hunting big targets; therefore, it makes sense to have viable coverage in a role like Brennan’s. He’s dealt with nothing internally at Vanguard, but he’s seen many different companies use D&O coverage all the time.

Beyond enforcing a stable culture, Brennan utilizes lots of different types of coverage to combat strategic risk, fraud, cyber risk and various more that he manages for his team of 850 employees. His coverage financing ranges from Vanguard’s reserves, insurers underwriting Vanguard, self-insurance, to captives with associations such as Investment Company Institute. This diverse set of insurance methods displays Brennan’s ability to adequately assess risks proactively and with a purpose. Although many directors and officers in public companies do in fact overlook the risks they face, Mr. Brennan is a perfect example of an officer taking the necessary steps to manage the often-underestimated loss exposures of a large organization.


Do directors and officers of public companies face too much pressure or scrutiny? Mr. Brennan asserted that “the rules are pretty clear. The SEC has made them very clear actually… we are no longer in the 1970s or 80s, so we can look up what can and can’t be done.” When disaster strikes, it is meaningless whether key executives were oblivious to exposures or did know of exposures and didn’t care to act. The result will be undesirable both ways because they either didn’t know what was happening or neglected it; this causes damaged parties to pursue litigation. Brennan stated “it’s not a pressure. It’s pretty easy for [Vanguard] officers to deal with the things happening. These exposures usually stem from ignorance or poor choice.” Brennan is obviously not one of the officers in a public company ignoring the importance of proper exposure control for public companies, but he still acknowledges the dangerous level of risk that comes with high-profile key executives.

Works Cited

Chicago Tribune. (2019, October 14). Timeline: Boeing 737 Max jetliner crashes and aftermath. Retrieved

November 14, 2019, from

Marshall, A. (2019, March 19). SEC: Elon Musk Fully Ignored a Key Term of Settlement. Retrieved

November 14, 2019, from

(n.d.SEC). Retrieved from

(n.d.V). Retrieved from



Shannon Tornoe – Coast to Coast Insurance Brokers (Owner)

Joseph Brennan – Vanguard (Global CRO)