What is Dedicated Side-A Coverage in a D&O Policy?
A D&O policy commonly has three sides or parts which are identified as Side-A Side-B and Side-C. This is true in both the private company D&O market and public company D&O market. In this article we discuss how Dedicated Side-A Coverage fits into a management liability program.
As a refresher,
Side-A protects the organization’s directors and officers from indemnifiable claims which we’ll dig into in a second.
Side-B reimburses an organization for costs of indemnifying directors and officers,
and Side-C is entity coverage. In public companies, Side-C provides protection only for securities litigation. And in private firms, Side-C is broader protection to respond to any claims where the corporation is sued along with the directors and officers.
For directors, Side-A is the most important part or side of the company’s D&O policy because it applies solely to cover the directors and officers of the firm. It is triggered when, or if, the entity is unable to indemnify the directors and officers or refuses to indemnify the D’s and O’s in a claim.
Side-A coverage is personal net worth insurance.
This is because lawsuits which allege management or leadership wrongdoing or malfeasance will name leaders individually, putting those leaders’ personal assets at risk.
Now, why would a company be unable to, or refuse to, indemnify its board when a D&O action arises?
Commonly these defense refusals occur when the company or organization files for bankruptcy or insolvency, or there is a legal prohibition against indemnification.
In the case of insolvency or bankruptcy, the company’s D&O policy often becomes an asset of the bankruptcy estate and courts will bar indemnification of leaders. Also, in a fundamental sense, if the firm is insolvent there are no funds left to provide indemnification, so company leaders are bare for protection from lawsuits that often arise in bankruptcy or insolvency.
Legal prohibitions often include:
- Derivative actions. In fact, the state of Delaware does not permit indemnification of settlements in derivative lawsuits. And,
- Then there are regulatory, criminal, or bad-faith acts of directors and officers, which can bar indemnification by law.
- Finally, there are situations in takeovers or reconstitutions of a board that can trigger the board to refuse indemnification of a prior board and those directors and officers will find themselves out in the cold.
So, whether the directors and officers are not able to be indemnified for their potential liability by law, or they are refused indemnification there is a tremendous gap that puts the personal assets of company leaders at risk.
This is where a dedicated Side-A policy steps in to protect the directors and officers.
Dedicated Side A essentially sits on top of the traditional D&O policy, or on top of a “tower” of D&O coverages which are arranged to provide high limits of protection from D&O lawsuits. It is a policy or layer of protection solely for directors and officers in the event all other coverage parts or policies are exhausted or become unavailable as previously discussed. Essentially it becomes the last line of defense for Ds and Os.
Two different forms of Dedicated Side-A Coverage:
- The first is standard excess Side A coverage.
- The second is broader DIC or Difference in Conditions Side A coverage.
Dedicated Side-A DIC is the preferred coverage form over excess Side-A for a few reasons:
- The first is that Side-A DIC will provide what is known as Drop Down coverage to provide protection where a straight excess Side-A policy will not. This occurs when an underlying policy is not exhausted. When an underlying insurer may refuse to pay a claim and it doesn’t exhaust its limit a straight excess policy is not triggered, and no coverage is provided to the Ds and Os. Side-A DIC does drop down in this situation and protects the company’s leaders.
- Second, Side-A DIC cover is broader than straight excess Side-A. It has fewer – if any – nasty exclusions, it is non-rescindable and non-cancelable.
- Dedicated Side-A coverage, whether excess or in a DIC policy provide exclusive limits just for the directors and officers, they are not shared with the entity in a traditional A-B-C policy and in both the DIC and straight excess a Side-A cover provides first-dollar protection as there is no retention in this policy layer.
Here’s the bottom line.
If you’re an owner, executive, director, or another officer within a private or public company D&O insurance is critical to protecting you and your personal net worth. Crafting a D&O protection program properly to give you the most protection possible takes an expert – it’s not something that should be left to a broker who only “dabbles” in management liability insurance. I’ve been involved in D&O and other management and professional lines of insurance since their inception in the early the 1980s and I work with a variety of large private and small public companies in this area.
If you need a second opinion on your management liability insurance program – or are looking to purchase D&O insurance for the first time, give me a call, or click the button below to get started. Thanks!