What are Sides A, B & C in a D&O policy? Sides isn’t a word we often use in insurance, so this can be a bit confusing, but don’t worry. In this article, I’m going to go over what each side or portion of a private company D&O policy is and why it’s important to understand them.
So, let’s start with a basic overview of what D&O insurance is and what it does.
D&O stands for directors and officers liability insurance, and unlike a lot of other policy forms, this policy does not cover the company for claims that arise from accidents or injuries or claims for bodily injury or property damage. In fact, both are excluded in this policy.
So, what does D&O Policy cover?
The D&O policy covers claims that allege some form of wrongdoing on the part of a company’s leadership – the directors, the company officers as well as the managers and employees of the company.
Claims can be brought by competitors, government regulators, employees, customers, investors, lenders and many others.
The scariest part of these types of lawsuits is that they often name the individual director, officer, or employee personally for their acts. Yes, you can be sued as an individual in your capacity as a company leader.
What does that actually mean?
It means that your personal assets are at risk. It means you may need to personally defend yourself in a lawsuit, which can get pretty expensive. Okay, so you’ve got these potential claims which can arise from a variety of sources, they often allege wrongdoing that has financially harmed the plaintiff in a suit who is seeking money damages from you personally.
This is why D&O insurance should be on the minds of every company leader.
So let’s dig into what is meant by the three sides (Sides A B & C) of a D&O Policy so you can make a more informed decision when you’re buying this coverage.
Side-A is known as the failsafe protection for the individual directors, officers and employees who may face a lawsuit.
There are situations and circumstances when your company can’t or won’t come to your defense or can’t pay for your costs. This is known as a non-indemnifiable claim. The company won’t indemnify or pay your costs.
The most common reason a company cannot indemnify you for your costs is when the company is in bankruptcy or can’t afford to pay your defense costs or ultimately your settlement costs.
Moving onto Side-B – this is the Corporate Reimbursement portion of the policy.
If the company does pay for your costs related to a claim this section of the policy reimburses the company for those costs. This is also known as balance sheet protection.
Finally is Side C – which is known as entity coverage.
In a private company Side C protects the company or entity if they are named in a suit alongside the directors and officers. In a public company side-c is reserved for securities claims.
Why does the policy have three distinct sides (Sides A B & C) or coverage sections?
The D&O policy is designed this way in order to address how claims can arise, who can be sued, and under what circumstances the policy responds.
For private company directors and officers I think Side A deserves a more discussion.
The first point on Side A I want to make is that there is no retention or deductible.
That means that if an insured – a person, employee, director, or officer is sued and the company doesn’t or can’t pay their legal bills, the good news is that they don’t have to dig into their own pocket to fork over a deductible. The insurance company pays first dollar.
The second point is that a secondary policy is available known as dedicated Side-A, or A-Side Protection, or Side-A DIC coverage. This is a separate policy bought in addition to a primary D&O policy that ONLY provides protection for directors and officers.
Something to consider when you’re leading or advising a larger private company with private equity or VC investors.
That wraps up the discussion around the three sides of a D&O policy, but before I end, I want to give you 6 other bullet points to consider or think about if you’re in the market for D&O insurance.
- Understand your directors’ needs and wants. You may think a $1M policy is sufficient, but your directors and officers may have higher expectations.
- Understand the retentions or deductibles in your policy and how you’ll come up with that cash in the event of a claim. Balance policy savings for higher retentions with realistic abilities to pay that retention.
- D&O policies are not standardized and need to be crafted to your particular circumstances. You can broaden protection to include claims from employment practices, ERISA based claims and more.
- Update your D&O Policy regularly – typically at every renewal. Look to your broker for enhancements.
- D&O policies are written on a claims made policy form so be careful when switching insurers and do not create a gap in coverage.
- Finally, I don’t advise buying your D&O online from a digital broker. Yea, fast and easy quotes are great, but often these types of policies do not come from highly rated insurers, and often have undesirable policy features.
Here’s the bottom line Sides A B & C in a D&O policy.
D&O insurance is crucial protection for you as a company leader and for your company. Getting the right protection is paramount.
That’s why I think working with a skilled broker who is an expert in this line of business makes a lot of sense.
If I can help you with D&O insurance, or any other form of business insurance I hope you’ll contact me and see if we’re a good fit for you and your business.