With great power comes great responsibility, especially in today’s legal environment where directors and board members have a ton of legal responsibilities to shareholders, creditors, investors, employees and client companies for every single management decision made. The hiring and firing process, decisions regarding contract disputes, financial performance, corporate policies, discrimination, sexual harassment, are just several of the many decisions a director or board member can be held accountable for if things go south.
For this reason, a lot of potential company directors, board members or officers will be hesitant to take on such a position, unless they are protected by a directors indemnity insurance. This insurance is one of the most discussed and least understood ones. So before tailoring a policy for a directors indemnity insurance, there are a couple of things to know.
First off, there isn’t a single standard D&O indemnity insurance policy. Each proposal and policy has to be evaluated on its own merit. However, there are three typical ways to structure the D&O policy, and in order to make the best decision, it’s highly advisable that you hire an insurance broker to get professional advice and personal service. These policies typically cover three kinds of losses, that are commonly referred to as Side A, Side B, and Side C.
- Side A – covers a director’s direct losses (losses not indemnified by the business). What makes this policy important is the fact that the company might not be able to indemnify its director if it becomes insolvent or where it’s prohibited from doing so legally.
- Side B – covers claims made against the D&O, but for which the business has indemnified them. Or simply put, the business gets reimbursed when it indemnifies their D&O or advances legal costs on their behalf.
- Side C – covers claims made against the company itself. This side is often referred to as entity coverage and is typically limited to losses from securities claims brought against it. (Securities claims applies to publicly traded and large private companies only).
All of these policies have a stated limit of liability (the total amount of loss covered during the policy period, no matter how many claims are made). This limit is shared among all insureds, which means that one insured’s defense fees can deplete the amount of coverage available to other insureds. If a lot of insureds share a single pool of coverage, this might become problematic. However, there’s a way to address this problem with a policy known as Separate Side A Only Coverage.
The separate Side A (DIC) only coverage provides an extra layer of protection to D&O in case the company is unable to indemnify them. Some Side A DIC only policies have a more favourable coverage terms than traditional indemnity policies. Businesses should ensure that their insurance program includes this policy for their D&O, either in their primary policy or by using a Side A DIC.