Which Side Are You On?
Directors and officers can be held personally liable for decisions they make on behalf of a company. Many companies purchase a Directors and Officers (D&O) policy to protect both the entity and individual directors and officers.
A typical D&O policy form includes three insuring agreements known as “sides”:
- Side A – Provides coverage to directors and officers when the company is unable to indemnify the individuals
- Side B – Reimburses the company when it indemnifies directors and officers
- Side C – Provides coverage for the entity when the company is named in a lawsuit
D&O insurance can be used to attract and retain qualified board members. Side A coverage is a key coverage that qualified board members want to see on a D&O policy, particularly since their personal assets are at risk. The laws where a company is domiciled determine the company’s ability to indemnify their directors and officers. Side A provides coverage to the directors and officers when state laws prohibit companies from indemnifying their directors/officers or if the financial condition of the company is such that it is unable to provide indemnification.
A derivative suit is one example where many states do not permit companies to indemnify their directors/officers. A derivative suit is brought by shareholders on behalf of the company and alleges that the directors/officers have breached their fiduciary duties. Many states do allow coverage for defense costs for this type of claim; however, settlement must be paid by either an insurance policy or the individual. The reason for this is that a derivative lawsuit is meant to be paid by the directors or officers to the company. If the company then reimbursed the directors and officers, this would defeat the purpose of the lawsuit and would not make the company whole.
There are two other scenarios where companies may not be able to indemnify their directors and officers. The first is if a company is going through bankruptcy proceedings and the company does not have assets to indemnify their directors or officers. Another situation where directors and officers cannot be indemnified is if it is against the corporate bylaws to do so.
Devon Park Specialty offers an additional $1,000,000 limit of Side A coverage automatically included as a part of our Executive ViewPoint (EVP) product, which is in addition to the D&O coverage part aggregate limit.
Our Executive ViewPoint (EVP) product offers coverage for directors and officers, employment practices and fiduciary liability, with limits up to $5,000,000 for each coverage part. Our EVP policy also has the following advantages:
- No hammer clause
- Non-rescindable policy
- $100,000 sub-limit (defense and indemnity) for Wage and Hour claims, available in most states via endorsement
- Lifetime Occurrence Reporting Provision (LORP) for former directors and officers
Please contact your Devon Park Specialty underwriter today for more information on our EVP product.
As always, thank you for your support and business.
Contact Kenny Bang
Product Leader | 844-438-6775 Ext. 2923
Written by Samantha Hildebrand
September 6, 2018