Side A D&O Coverage: 6 Things You Should Know
Whether you are part of a Fortune 500 business or a community church, Directors and Officers (D&O) insurance is an important aspect of your organization’s risk management plan. Any company with multiple shareholders or stakeholders needs this coverage, particularly Side A D&O. The reality is that no one will join a board of directors if they don’t have legal protections against the chance of something going sideways with the organization.
But what is Side A D&O?
Side A D&O provides financial protection when a company cannot or will not indemnify the individual directors and officers, such as due to insolvency or a court order.
Since Side A D&O is designed to individually protect a director's assets in the event of a lawsuit, this coverage is critical. Without it, all your board members are put at personal risk for what takes place in the organization. Specifically, if leadership team members are named in a lawsuit against a company, they can lose their houses, savings, stocks, vehicles, other businesses, and more if they are found liable and lose the case. Side D&O protects their life’s work.
History of Side A D&O Insurance
D&O liability insurance has been around since the early 20th century and was originally created for the same reason it exists today—to protect directors and officers from personal liability risks when making decisions on behalf of their organizations. But its evolution has been especially pronounced over the last several decades.
Key events, such as the aftermath of the Great Depression, heightened shareholder activism in the 1960s; and the U.S. savings and loan crisis in the 1980s was especially pivotal in reshaping D&O coverage. As institutions faltered and collapsed, corporate governance came under the microscope. Lawsuits targeting directors and officers for alleged mismanagement surged. In the midst of this turbulent financial climate, the D&O insurance market evolved to crystallize the distinctions between Side A, B, and C coverages (previously, they had been undefined).
Side A in particular was introduced as a specialized coverage designed to protect individual directors and officers in situations where the company itself couldn’t or wouldn’t back them due to legal or financial constraints. Over time, Side A D&O has become an essential safety net for directors and officers, ensuring their personal assets are shielded from the increasing array of liabilities they face.
Today, the policy and its applications are still evolving. This is evident from the increasing number of cases, ranging from competitors suing each other over employee poaching to governmental claims regarding environmental contamination. As a result, the need for directors and officers insurance becomes more relevant with each passing day.
Here are six things you should know about Side A D&O coverage.
1) Side A D&O insurance is specifically designed to protect the personal assets of an organization's directors and officers.
As we mentioned above, the most important thing to know is that Side A D&O insurance protects the directors and officers in a lawsuit when they are not indemnified by the corporation. Usually, this is when indemnification is either barred by law or the organization is insolvent and unable to indemnify the individuals. This is why bankruptcy, derivative litigation, regulatory, and criminal proceedings against the individual insureds, or even acts of "bad faith" committed by the directors and officers are all situations that put the board members at risk, because the organization cannot provide them any protection or assistance in fighting the claim.
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2) The "Yates Memorandum" signaled a shift toward more individual accountability for corporate wrongdoing. This means Side A is more important than ever.
A memo released by former U.S. Deputy Attorney General Sally Yates states that one of the most effective ways to combat corporate misconduct is to seek more accountability from the individuals who perpetrated the wrongdoing.
The Department of Justice issued a memorandum outlining six steps to ensure corporate investigations are handled consistently across the department to address individual accountability:
- To be eligible for any cooperation credit, corporations must provide the Department all relevant facts about individuals involved in corporate misconduct;
- Both criminal and civil corporate investigations should focus on individuals from the inception of the investigation;
- Criminal and civil attorneys handling corporate investigations should be in routine communication with one another;
- Absent extraordinary circumstances, no corporate resolution should provide protection from criminal or civil liability for any individuals;
- Corporate cases should not be resolved without a clear plan to resolve related individual cases; and
- Civil attorneys should evaluate whether to bring suit against an individual based on considerations beyond that individual's ability to pay.
As you can see, the focus is on shifting the liability from the corporation to the individual, usually a director or officer of an organization. Side A D&O is protection for these individuals in these disputes.
3) Side A limits are often shared with Side B and C (or possibly even other management liability coverages).
It is not uncommon to see a D&O policy or a management liability policy that shares limits for each coverage side. There are also policies that will include coverages such as employment practices under that same limit.
The problem is that a corporate D&O suit can involve both the corporation and the individuals involved. In this scenario, it is possible for the corporation to exhaust the limits of insurance and limit the amount of coverage left for the individual, putting their directors and officers at risk.
That is why we recommend either purchasing larger limits or purchasing a Side A DIC policy to get dedicated limits for the directors and officers individually.
4) Consider a Side A Difference In Conditions (DIC) policy if your executives want more individual protection and dedicated limits.
One of the ways we recommend business executives structure their insurance is to have a primary D&O insurance policy with Side A, B, and C. Then we suggest they purchase an excess policy called the Side A DIC.
This doesn’t just provide dedicated limits for individual directors and officers; many of these policies will also broaden coverage significantly and act as primary coverage for certain claims.
Yes, this is an excess policy and will usually pay over the limits of the underlying insurance policies. But Side A DIC will drop down to pay in the place of a primary carrier if:
- Coverage is broader;
- Primary or excess insurers invoke the presumptive indemnification clause;
- A rescission action is filed by an underlying insurer;
- The underlying limits are exhausted;
- The underlying insurer is insolvent;
- Or the underlying policies are held as assets of a bankrupt estate.
This provides a guarantee for your business leaders that there are dedicated limits just to protect their personal assets.
5) Defense costs often erode the limits of liability.
When choosing limits, insureds frequently don't consider that those limits must be enough to cover any settlement or judgment and any costs to defend the individual or corporation in the claim.
Complex claims with multiple parties (i.e. lawsuits defending multiple board members and the organization) can take up a significant portion of your limit, leaving officers with a potentially small limit to resolve any of the claims naming them personally.
It is critical to purchase enough D&O insurance limits to account for defense costs, or purchase a policy covering defense costs outside the limits of insurance.
6) If you ever change D&O providers, make sure to purchase tail coverage or a retroactive date.
Unlike traditional commercial general liability, which only requires a claim to occur in the policy period, D&O insurance requires the claim to have occurred and been reported within the policy period. In this scenario, the policy period is from the retroactive date to the end of the policy (or the tail).
If you cancel your D&O policy, make sure you purchase tail coverage to extend the end of the policy; you can also purchase a retroactive date, which adds coverage for a specified period before the policy starts. If you don’t elect to do one of these things, you have a significant coverage gap.
For example, if your company changed insurance companies without purchasing tail coverage or a retroactive date, a claim would be denied if any part of the incident happened before the most recent policy began.
Side A D&O Claim Examples
To help you understand the importance and use of Side A D&O coverage, here are some common examples of when this policy would kick in:
Example 1: Insolvency and Shareholder ActionsFollowing the global financial crisis in the late 2000s, a large financial institution faced insolvency due to massive losses in its investment portfolio. The company’s directors and officers were sued by shareholders for alleged mismanagement. When the company declared bankruptcy and couldn’t indemnify its directors and officers, Side A D&O coverage stepped in to defend and cover the individual leaders' legal expenses.
Example 2: Regulatory RestrictionsA health tech startup was investigated for misrepresentation of its product's capabilities. The state barred the company from indemnifying its leaders, citing a violation of public policy. Here, Side A D&O came to the rescue. It covered the legal defense costs of the company’s CEO and other board members who were under scrutiny.
Example 3: Acts of "Bad Faith"A manufacturing company’s CEO made decisions that were deemed to be in his own personal, rather than the company's, best interest, leading to significant financial loss. Shareholders brought a derivative action against the CEO, alleging breach of fiduciary duties. Given that the actions were classified as "bad faith," the company couldn’t indemnify the CEO. The CEO's legal defense and potential settlements were handled by Side A D&O coverage.
Summary
Side A D&O is one of the most critical coverages to protect the personal assets of your organization's directors and officers. It is also one of the most complex insurance policies that exists.
If your organization needs help purchasing a D&O insurance policy or a Side A DIC policy, let us know!
About The Author: Austin Landes, CIC
Austin is an experienced Commercial Risk Advisor specializing in property & casualty risk management for religious institutions, real estate, construction, and manufacturing.