Most responsible companies maintain Director & Officer insurance policies ("D&O Policies") in order to protect its directors and officers against all types of potential liabilities, including shareholder derivative lawsuits.  In fact, a company would be hard pressed to recruit and maintain experienced and skilled officers and directors without adequate D&O insurance coverage.

A typical D&O policy, however, will contain a substantial Self Insured Retention ("SIR").  A company must satisfy (i.e., pay) the SIR before the insurance company begins paying for the defense (or indemnity) of a shareholder derivative lawsuit.  The amount of a typical SIR varies with ranges from $25,000 to more than $250,000.  Thus, where a D&O policy contains a $150,000 SIR, the directors and officers (or the company) will have to pay $150,000 in defense costs out of their own pocket before the insurance company begins paying for the defense of a shareholder derivative lawsuit.

Most D&O Policies provide a separate coverage for "investigation costs."  Investigation costs usually cover attorney's fees, consultant fees, and other out of pocket costs incurred by the SLC in investigating the shareholder derivative allegations.  Importantly, many D&O Policies provide that the SIR does NOT apply to "investigation costs."  This means that an SLC is free to conduct a complete and thorough investigation without the burden of depleting the company's resources.  By tapping the coverage afforded by most D&O policies, a company may be able to achieve the best of both worlds: an SLC investigation (which may provide a complete defense to a shareholder derivative lawsuit) funded entirely by the insurance company.