The turmoil at chip giant Nvidia following the ouster of founder and CEO Jensen Huang, which wiped out nearly $200 billion from the company's market value on Thursday, is now exposing an unusual and dangerous vulnerability: Nvidia lacks a common type of insurance that protects public companies from legal claims.
According to two sources familiar with the company's policy who spoke with the Financial Times, while Nvidia secured up to $900 million in insurance coverage protecting the personal assets of its senior executives and board members, it does not hold directors and officers liability insurance covering the company itself against damages and legal expenses arising from the conduct of its executives, leaving its financial balance sheet exposed to potential investor lawsuits.
This comes after Huang resigned on Thursday following disclosures that he had conducted two extramarital affairs and after he admitted to having a relationship with a woman whom US authorities believe acted as a Chinese spy. Following the turmoil, Nvidia shares closed down 4.3% on Thursday, a move that wiped out nearly $200 billion of the company's market value.
Nvidia's insurance gap leaves shareholders exposed to legal risks
Public companies purchase D&O insurance to protect themselves against lawsuits stemming from statements and decisions by managers and directors. Nvidia is already facing at least one such lawsuit, after shareholders sued the company, as well as Huang, this week as part of a class-action lawsuit request. The lawsuit accuses them of making false and misleading statements regarding the founder's ties to Alice Huang, who is suspected of being a Chinese spy.
D&O insurance plans typically include what is known as "Side A," which covers the personal assets and legal defense expenses of the company's directors and officers, as well as "Side B" and "Side C," which protect the company's own balance sheet.
A 2018 survey by insurance brokerage WTW found that about 91 percent of public companies reported purchasing dedicated D&O insurance, and that more than 80 percent of public companies purchased Side B and Side C coverages in addition to Side A coverage. Some companies choose not to purchase Side B or Side C coverage due to the high cost of insurance for large public companies, although lawyers and insurance brokers told the Financial Times that this is uncommon.
According to sources familiar with the coverage details, Nvidia purchased Side A insurance through its insurance broker covering the company's directors and officers up to a cap of $900 million, with its insurers including Beazley, AIG, and Chubb.
However, the chipmaker's policy was restricted to Side A only and did not include Side B or Side C coverage. This limitation leaves it potentially exposed to future class-action lawsuits, including stock-drop lawsuits filed following a decline in the company's share price, which typically argue that the drop was caused by the company or its directors making false statements or concealing material risks.
A claim under Nvidia's $900 million Side A insurance policy could be triggered via a shareholder derivative lawsuit, typically filed by a shareholder on behalf of the company against managers or insiders alleged to have harmed the company.