Nvidia D&O insurance coverage gap, Digi Mart USA News: Nvidia is facing a shareholder class action linked to a personal scandal involving former Chief Executive Officer Jensen Huang. According to the Financial Times, which cited multiple sources, the company bought directors and officers (D&O) liability insurance of up to $900 million through the broker Aon, but that coverage reportedly applies only to “Side A.”
Side A protects the personal assets and legal defence costs of executives and board members. Side B, which reimburses the company for indemnification payments made to executives, and Side C, which covers securities-related lawsuits against the company itself, were not reportedly included in the contract.
The report said this is unusual: a 2018 survey by insurance broker WTW found about 91% of listed companies held D&O insurance, and more than 80% had secured Sides B and C alongside Side A.
Aaron Le Marquer, head of policyholder disputes at British law firm Stewarts, was quoted as saying that for a listed company it is standard and in effect considered essential to have both A and B coverage, and that most large U.S. listed companies also carry C coverage because litigation risk is high.
Litigation has already started. Shareholders have filed a class action alleging that the company and Huang made false or misleading statements about his relationship with Alice Huang, who is suspected of being a Chinese spy.
A possible additional “stock drop” suit seeking compensation for investment losses has also been discussed. Huang’s personal liability may fall under Side A depending on the lawsuit type and policy terms, but the damages and legal costs borne by the company could fall on Nvidia itself.
The share price has reacted sharply. According to the report, Nvidia shares fell about 12.8% in the week from the 9th to the 13th after Huang admitted to the affair on the 8th, while the Nasdaq index rose more than 2% over the same period.
The Wall Street Journal reported that the market capitalisation lost during that week was $573 billion, the largest weekly decline ever for any company worldwide, and that market value has fallen more than $1.8 trillion from its peak on the 6th of last month, to below $4 trillion.
The chain of events began after a New York Times report late last month linked Huang to a woman suspected of being a Chinese spy. Huang admitted to the affair on the 8th of this month, and after further allegations of an affair with an in-house executive, he stepped down as CEO on the 12th.
The case illustrates that holding insurance does not fully hedge a company’s litigation risk. Because Sides B and C directly protect a company’s financial position, the report suggests that without such coverage, a class-action loss could be recorded as non-operating expenses and weigh on earnings.
The company has not yet issued an official position on its insurance structure, and how the lawsuits and any coverage disputes with insurers develop remains to be seen.
