How Side A Coverage Protects Directors and Officers (When the Company Can’t)

By Jeff Hamann

When you’re looking at renewing or taking out new directors and officers liability coverage for your company, one thing you’ll run into early on is the different “sides” of these policies.

In short, if you’re a public company (regardless of size), you’ll want to give serious consideration to Side A, Side B, and Side C coverage. If you’re not public, Side A and B will probably do the trick.

But what is Side A? I’ll walk you through the jargon in this piece, but in short: It’s a way for your company’s officers and directors to be covered when the company can’t (or won’t) foot the bill.

What Is Side A Coverage in D&O Insurance?

As I said mere moments before, Side A liability coverage provides protection for your company’s officers and directors when the company can’t. Directors and officers can often be named individually in lawsuits against a company (or its actions), this can put their personal finances at risk.

Of course, often companies will step in to help any officers or directors named in a suit, and there’s D&O coverage that pays the company back — but that’s Side B coverage. Side A coverage instead is for when the company can’t or won’t handle a director or officer’s legal fees or settlements they may face.

When Companies Can’t Indemnify

There are a number of situations where a company isn’t able to reimburse a director or an officer for legal fees, settlements, and whatnot. Here are the most common ones:

Bankruptcy (or Lack of Funding)

This one shouldn’t be too surprising: If a company is bankrupt (or in a really rough spot, financially), Side A coverage can be used to cover legal costs for its directors and officers. This is a great assurance for a company’s board and executives, as they are protected — even if the company itself is failing.

Legal Restrictions on Indemnification

Sometimes a company isn’t legally permitted to cover the costs of its directors and officers in the event of a lawsuit. Take charges of securities violations, for example: In cases like these, officers and directors would need to cover defense costs themselves. Side A changes that.

Of course, there’s a big “but” here. Most (read: virtually all) D&O insurance policies won’t cover an officer or director who has done something illegal (or did something wrong, intentionally). Still, Side A coverage will cover the defense costs unless the verdict comes back guilty — in which case the officer or director would need to reimburse the money already paid out.

Conflicts of Interest

There are times when a company may not cover a director or officer because the person took some action or decision which didn’t align with the company’s best interests. In these cases, Side A also kicks in.

Let’s say a director approves a deal with a different company he or she owns some shares in. This might be viewed as a conflict of interest from the first company’s perspective. If a lawsuit were to come about, the company could decline to indemnify the director. Side A would step in to cover legal costs in these cases — again, provided nothing illegal transpired.

How Side A Coverage Works in Practice

Now that we’ve got the basics down, how does Side A coverage actually work? And which parts of legal costs are covered (and which aren’t)?

Triggering Side A: What Events Lead to Coverage?

If your company faces a lawsuit that names a director or officer, Side A won’t kick in automatically — but it’s thankfully not too complicated (from your end, anyway). Provided the company isn’t able to indemnify the person or people, it’s time to file a claim. This is typically done by the officer or director (or their legal counsel). The insurance company will evaluate the claim and provide coverage, as long as all policy conditions are met.

To clarify the illegality part I mentioned a bit earlier, note that Side A coverage will still generally cover a director or officer accused of something illegal, so long as it’s only an allegation. If the director is found guilty of illegal acts (or if they admit to it), they’ll need to repay any money the insurer has paid for their defenses.

Legal Costs, Settlements, and Judgments: What’s Covered?

While some of this will depend on the specifics of your actual D&O insurance policy, typically Side A will cover legal defense costs, meaning court costs and attorney fees. Most policies will also cover settlements and judgments, provided that nothing illegal happened.

Side A Difference-in-Conditions (DIC) Policies

All insurance policies have limits, and for Side A limits, a DIC (or “difference-in-conditions”) policy can offer extra protection to your directors and officers. These policies can offer broader coverage with fewer exclusions. A lot of companies will consider adding DIC policies to their coverage in times of higher risk, like during bankruptcy filings or major litigation.

Side A Coverage Exclusions

Side A won’t cover everything. Let’s go through a few of the most common exclusions.

Fraud and Intentional Wrongdoing

If a director or officer intentionally does something wrong or illegal, don’t count on Side A to protect them after it’s been proven or admitted. And even while the insurance company will likely advance funds to cover defense costs, those will have to be paid back via clawback provisions.

Criminal Acts and Regulatory Violations

The same applies here, really. Side A will provide coverage until the illegality (or intention) or something is proven.

How Exclusions Can Impact Defense Costs

So, what happens if an exclusion gets applied, mid-lawsuit? Generally, your insurance provider will stop covering your directors’ or officers’ legal fees — yes, even midway through a case. That would leave them exposed and responsible for covering the remaining costs of their defense. And most of the time (as I’ve said a few times by now), the insurance companies will pursue any clawback provisions in the policy to get back what they’ve already paid out.

Note: With Side A coverage, because the company isn’t indemnifying anyone, the clawback provisions will (nearly always) impact only the director or officer receiving the funding.

What’s the Right Level of Side A Coverage?

There’s no simple answer to this one. There are a few different areas to consider:

Your Company Risk Profile

Depending on the size, location (think state laws), industry, and myriad other factors, your company’s risks may be high, low, or somewhere in the middle. This is more art than science, but it’s at least a little bit science. If you operate in the technology, finance, healthcare, or energy industries, expect insurers to price you a bit higher than companies that operate in the non-profit, education, or retail sectors, for example. And, of course, the larger the company (whether by employee headcount or revenue), the larger the insurance premiums.

Beyond this, you should also look at:

• Your claims history with D&O insurance
• Your corporate governance practices
• How stable your leadership team is
• Your financial health

All of these will be assessed by any insurance company during underwriting, so it pays to be prepared — and even work on a few of the factors you can influence. One example is to put in place unassailable corporate governance practices. And even if you can’t change what your company is and how it operates, it can help determine how much insurance you really need.

Your Team’s Exposure

The individuals on your leadership team could be a potential liability. If you have a board member who has been party to several lawsuits — even with a different company — this could come back to drive premiums higher. It also probably means you should think about taking out a bit more insurance.

Limits and Cost Considerations

This is a bit of a balancing act. Getting the highest levels of coverage might sound like a good idea to reduce your exposure, but you’ll likely pay through the nose for it. And going with the cheapest policy means you’ll likely not be fully covered should the worst (or even something relatively bad) happen.

Thankfully, there’s a lot of middle ground with Side A coverage. Work with our team at Janover Insurance to identify what the right level of coverage is for your company. Hint: It’s rarely (if ever) the most expensive or cheapest policies out there.

Considering Your Side A Coverage

There’s a lot to consider with your Side A protections for your company’s officers and directors. And then you have your Side B coverage to think about as well — not to mention Side C if you run a public company.

It’s really, really important to get this right. Don’t guess — instead, work with our team to get the right policy for your company. All you need to do is fill out a short form, and we’ll get to work on your free quote.