Directors and Officers Liability Insurance: Important Considerations for Both Individual Executives and Companies
Whether an individual is sitting on the board of a local nonprofit entity, a mid-sized private firm or a large Fortune 500 company, Directors and Officers Liability insurance (D&O) is an important consideration for both individual executives and the company. At its most basic level, D&O coverage is intended to protect directors and officers for decisions made on behalf of the organization.
One important aspect of D&O Liability insurance that is misunderstood is Side A DIC (Differences-in-Conditions) coverage. Executives should understand the importance of an excess Side A DIC policy and why it should be considered part of the organization’s insurance portfolio.
D&O coverage is valuable as it provides personal asset protection for individuals as well as balance sheet protection for the organization.
An organization is best positioned to attract and retain the most qualified individuals for its board when it has adequate D&O coverage in place. Ultimately, individuals who are considering whether to accept a board seat will be much more inclined to do so if they know their personal assets are well protected.
A standard D&O policy is structured with three components:
- Side A (individual non-indemnified protection)
- Side B (individual indemnified protection)
- Side C (Entity protection)
D&O Side A coverage is designed to respond to non-indemnifiable loss. In other words, loss that cannot be compensated by the organization. This provides coverage when the organization cannot or will not protect its leaders. Common reasons for this coverage trigger include the inability to indemnify due to the company’s insolvency, company by-law restrictions or a securityholder derivative demand.
In addition to a standard full primary D&O policy, clients should be aware of the benefits of securing an excess Side A DIC (Differences in Conditions) policy. There are specific elements of this coverage that provide additional protection to individual insureds in cases of non-indemnification and can help to fill gaps within the primary policy.
A Side A DIC policy sits on top of a traditional D&O policy and provides a broader form of protection for individual directors and officers. It functions in two important ways.
- It acts as a standard excess policy to the primary D&O coverage that provides additional protection to an individual’s personal assets after the underlying policy limits have been exhausted.
- The policy fills gaps in the underlying coverage when the primary carrier or underlying excess carriers within the D&O tower either fail or refuse to pay a claim, attempt to rescind coverage or become insolvent.
Consider this example:
An executive of a management consulting firm was alleged to have engaged in a scheme to defraud clients and obtain money through fraudulent conduct, including issuing phony invoices for professional services rendered. A federal criminal indictment was issued against the executive. The consulting firm submitted a claim to their primary and excess D&O carriers. Based on the alleged allegations, the company refused to indemnify the executive. The claim was quickly denied due to the professional services exclusion under the policy. Given this denial along with the company’s refusal to indemnify, the Side A DIC policy dropped down to cover the defense costs for the executive.
In this ever-changing insurance market, D&O coverages continue to evolve due to increased settlements and judgements brought against directors and officers. Businesses should continue to evaluate their current D&O coverage to determine appropriate limits and whether a Side A DIC policy is suitable for them. If you have questions, reach out to your insurance agent to discuss your Executive Risk coverage in addition to a review of your entire program.
For more information, please contact us:
VP, Team Leader, Sr. Client Manager
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