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Expanded coverage for directors and officers

Side A DIC coverage protects directors and officers' personal assets when companies can't indemnify them, crucial for attracting leadership.

12/17/2024 · 8 minute read

A directors and officers liability (D&O) insurance policy is generally comprised of three insuring agreements — Side A, Side B, and Side C. Of those three coverage parts, Side A is the only one that applies solely to the directors and officers. Side A coverage provides personal asset protection for the directors and officers, typically covering a loss incurred by individual directors and/or officers resulting from claims for which the company has not indemnified them. Side A coverage is typically triggered if the company refuses or is unable to indemnify its directors and officers, the latter often arising in bankruptcy or when a company is in financial distress. Also referred to as “sleep insurance,” Side A D&O coverage is viewed as critical in attracting and retaining senior leadership.

Traditional Side ABC coverage can be exhausted by indemnifiable losses (for example, securities claims against the company and the directors). As a result, the majority of publicly traded companies purchase what is referred to as Side A difference-in-conditions (Side A DIC) coverage in excess of their Side ABC limits to provide additional protection to their directors and officers. This type of coverage is tailored to provide additional limits often with fewer exclusions and coverage specifically dedicated to individuals — only directors and officers are covered insureds under the policy.

Side A DIC policies can also fill gaps in the underlying traditional coverage (some examples include when the company refuses to indemnify a director, one of the underlying insurers becomes insolvent, or the claim is not covered by the underlying ABC limits). Because the company is not an insured under a Side A DIC policy, the company’s own defense or indemnity payments cannot erode the Side A DIC limit of liability.

D&O coverage basics

Directors and officers (D&O) liability insurance comprises distinct insuring agreements, each of which has a different function in the financial protection of either the company and its financial obligations or the assets of individual directors and officers.

Side A: Many companies buy Side A coverage, which is insurance for the directors and officers that is triggered if the company refuses or is unable to protect or indemnify its directors and officers. Side A coverage operates as personal asset protection. Side A DIC coverage is broader than traditional Side A coverage.

Side B: Reimburses the company for costs it pays on behalf of a director or officer (typically legal defense costs, settlements, or judgments).

Side C: Protects the company if it gets sued and operates as balance sheet protection.

What retention applies under Side A coverage?

If coverage under Side A is triggered, a covered director or officer does not generally need to pay a deductible or self-insured retention.

 

 

What is the latest innovation to enhance Side A coverage?

Marsh has created a groundbreaking Side A DIC coverage enhancement — Marsh’s Side A+ Protection Flip — that strengthens the protection for directors’ and officers’ personal assets by increasing the limits available to respond to a Side A DIC claim. This innovative offering is available to Marsh clients at no additional premium cost beyond what is already being paid for Side A coverage.

When is Side A coverage triggered?

There are situations in which an insured company is prohibited by law, corporate authority, or other corporate contracts from indemnifying one if its officers or directors. These include:

  • Derivative litigation judgments or settlements. Derivative litigation is brought by the shareholders on behalf of the company itself. As such, the ability of the company to indemnify its directors or officers for judgments or settlements resulting from a shareholder derivative action may be significantly limited or prohibited by statute. For example, Delaware law does not allow indemnification of settlements or judgments in an action brought by, or on behalf of, a company against its directors and officers.
  • Conduct not in “good faith” and “reasonable belief.” Under the current laws, a Delaware corporation may indemnify a director or officer only if such person acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, the best interest of the company. While rare, acts that do not satisfy the “good faith” and “reasonable belief” standard may not be indemnified by the company.
  • Public policy prohibition or statutory limitations against indemnification. Indemnification may be precluded by public policy. Insurers often take the position that amounts constituting restitution or disgorgement are uninsurable as a matter of public policy. Indemnification is typically precluded for claims under the registration and antifraud provisions of the federal securities laws. The Securities and Exchange Commission’s (SEC) view is that such indemnification is against public policy; however, since most D&O claims settle without an admission of liability, these claims are usually indemnified. Although rare in D&O claims, many states prohibit insurance for punitive damages as a matter of public policy.

There are situations in which an insured corporation has an obligation to indemnify one of its officers or directors but is either unwilling or unable to do so.

  • Refusal by board to indemnify. There are several scenarios in which a corporation is able to indemnify its directors and officers but chooses not to do so. For example, in a corporate crisis or in the aftermath of a hostile takeover, when part of an executive team or board of directors becomes hostile to other current (or former) members of an executive team or board, a covered individual may, rightly or wrongly, be denied indemnification. Any newly constituted board would make indemnification decisions and, if indemnification were permitted but not mandatory, might decide not to indemnify. Although the affected current or former director or officer may seek redress through litigation, the associated costs and expenses may be significant.
  • Near insolvency. In insolvency proceedings, as a company approaches the “zone of insolvency,” officers and directors may owe certain fiduciary duties to creditors. Although not yet insolvent, a company might choose not to indemnify a particular director or officer for fear that such an act may be a breach of fiduciary duty owed to creditors of the corporation. There could also be concerns that a bankruptcy trustee orders the director or officer to return the indemnification proceeds.
  • Actual insolvency or bankruptcy. The insured corporation may be unable or unwilling to indemnify an officer or director if a bankruptcy court determines in its judgment that such indemnification is either unwarranted or improper.

What are the benefits of Side A DIC insurance versus Side A insurance?

  • Broader coverage terms. Coverage provided by a Side A DIC policy is generally broader than the Side A coverage component of a more traditional ABC form. In most cases, it is also broader than a “standard” excess Side A form (a policy form that does not include DIC features). Coverage enhancements in these forms may include: 
    • Limited exclusions, if any. It is not uncommon to only see a conduct exclusion in a Side A DIC policy but no exclusions for bodily injury/property damage, pollution, insured versus insured, ERISA, FLSA. Defense costs are normally exempted from such conduct exclusions and they often do not apply to independent directors.
    • Not rescindable (the policy cannot be rescinded for any reason)
    • Non-cancelable policy once premium is paid
    • Insurer’s consent to defense counsel not required
    • Broad definition of insureds
    • Coverage for punitive and exemplary damages (where insurable)
  • Drop-down provision/protection against insurer dissolution and presumptive indemnification risk. In general, the limits purchased for a traditional D&O policy are layered and placed with a number of different insurers, because no single insurer wants to insure the entire risk of exposure for any one company. The potential downside is that if one insurer dissolves or is otherwise unwilling or unable to fund its limit of loss, insurers that have the obligation to insure a loss in excess of that “uncovered loss” may not respond unless that “uncovered loss” is otherwise covered or “backfilled.” An excess Side A DIC policy will drop down and respond to such a non-indemnifiable “uncovered loss in the event of carrier insolvency or failure to pay”.
  • Undiluted dedicated limits for claims against directors and officers. Under a traditional ABC D&O policy, with all three insuring agreements, the limits purchased by the company are shared limits that cover both the personal assets of individual directors and officers as well as the liabilities of the company. An excess Side A DIC policy will generally provide dedicated and exclusive limits for claims made against directors and officers that are not indemnified by a company.
  • Later settlement or judgment in derivative claim versus securities class action. Because there is an aggregate limit of liability for D&O programs, there may be situations when the insurance proceeds need to be prioritized among the insured parties. Typical D&O policies have a provision that prioritizes payments made by insurers in the event there are concurrent claims made against a company (indemnifiable securities class actions) and against its individual directors and officers (shareholder derivative claims, settlements of which are generally not indemnifiable.) These provisions typically state that insurance proceeds are paid first to protect directors and officers for non-indemnifiable claims, then paid to the company to cover corporate reimbursement and securities claims. There could be, however, complications when derivative cases (sometimes multiple) are filed as “companion” or “tag-along” suits to securities class actions, especially since derivative suits are typically settled after securities class actions. As a result, insurers may not be able to immediately pay a settlement for a class action, knowing that the later settlement of the derivative suit may be in excess of the policy limits. Having Side A DIC insurance in place in excess of ABC limits helps minimize that risk by providing an additional level of individual protection and dedicated limits that could be used for settlement of that derivative suit.

 A clear understanding of the additional protection offered by Side A DIC coverage can help ensure your directors and officers are thoroughly protected in the event of a claim.

Our people

Ruth Kochenderfer

Ruth Kochenderfer

Product Leader, D&O

  • United States

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