Whether you are involved in a Fortune 500 business or serving on the board of your local church, D&O insurance is an important aspect of any risk management plan for organizations with multiple shareholders or stakeholders.
This is particularly true for Side A D&O coverage.
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 per 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 particularly critical. Without it, all your board members are put at risk personally for what takes place in the organization.
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.
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.
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 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.
According to the Department of Justice, the memo outlined six steps in the department policy 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 DIC policy if your executives want more individual protection and dedicated limits.
One of the ways that we recommend business executives structure their D&O insurance is to have a primary D&O insurance policy with Side A, B, and C. Then we suggest they purchase an excess D&O policy specifically for Side A called the Side A DIC policy.
This doesn’t just help provide them with dedicated limits for the individual directors and officers; in addition, 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 what we mean by it will act as primary coverage is that the Side A DIC policy will drop down 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 the limit doesn't just include any settlement or judgment. It can often include any costs to defend the individual or corporation in the claim.
These complex claims can take up a significant portion of your limit, leaving your officers with a potentially small limit to resolve any of the claims.
It is critical to purchase enough D&O insurance limits to either account for the defense costs or to purchase a policy with 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 the traditional commercial general liability policy, which only requires a claim to occur in the policy period, the D&O insurance policy 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. 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 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!