Directors and officers liability insurance (D&O insurance) is important coverage that all companies (private and public) and not-for-profit institutions should consider carrying. It protects the assets of the entity’s directors and officers – and their spouses – in the event they are personally sued for wrongful acts or mismanagement of the organization.
Without D&O insurance, directors, officers, and their spouses can be at risk of losing their personal assets and incurring expensive legal fees to defend themselves against claims. Most directors and officers are aware of this coverage and require it before they agree to serve on a board.
What is less recognized is the importance of what is referred to as “Side A” coverage for D&O policies. Understanding this coverage can help you better protect yourself and your organization.
What Is Side A Coverage?
A key term keep in mind is “indemnification.” With D&O insurance, this means the directors and officers will be made “whole,” should they experience a financial loss as the result of a lawsuit related to their director or officer duties. This includes losses due to legal defense costs, an award or judgment against them, or both.
To best understand Side A coverage, it helps to break down the coverage of D&O insurance. It generally consists of three parts: Side A, Side B, and Side C.
- Side A coverage protects and indemnifies the directors and officers that are not, or cannot be, indemnified by the company or not-for-profit institution.
- Side B coverage, also referred to as corporate reimbursement coverage, reimburses the organization for the cost of the indemnification it provides to its directors and officers.
- Side C coverage is for the company or not-for-profit institution itself. It insures the entity’s own liabilities if it is named in a lawsuit.
Why Does Side A Coverage Matter?
Every decision an outside director or officer makes can put their personal assets at risk.
Side A coverage is important, because it specifically protects directors and officers, as opposed to the organizations they serve. It is designed to provide coverage in a variety of situations, including if:
- The organization chooses not to indemnify its directors and officers. (In most cases, it is not required to do so.)
- The organization will ultimately indemnify its directors and officers, but chooses not to advance them money for any legal defense required, leaving them to front the money.
- The corporation chooses not to indemnify its directors and officers for shareholder derivative claims.
- The organization files for bankruptcy, resulting in no money being available for the legal defense of its directors or officers.
Additional Protection for Directors and Officers
When purchasing D&O coverage, be sure to ask about a Side A “Difference in Conditions” (DIC) policy. This coverage can provide excess insurance when the underlying D&O limits are exhausted, and it can drop down to fill coverage gaps in the D&O policy. It often does not carry the same exclusions as the D&O policy.
Many insurance carriers also offer D&O policies that include non-rescindable Side A coverage. Even if there is a misrepresentation that voids the organization’s Side B and Side C coverage, the Side A coverage would remain valid, protecting the directors and officers. Non-rescindable Side A coverage is available for stand-alone Side A policies, as well.
Helping Entities Attract and Protect Their Leaders
Understanding D&O Side A coverage is critical for any entity that has directors and officers, and anyone who serves as a director or officer.
Having it in place can help attract the leaders you want to your organization, while providing them and their families with valuable protection and peace of mind.