How Side B D&O Insurance Coverage Protects Your Company (and Officers)

By Jeff Hamann

There is a heap of jargon in the insurance world, and D&O insurance isn’t any exception. D&O — that is, directors and officers — insurance protects your officers and directors from legal liabilities relating to the company. And it does so in a few different ways.

These ways are included as various “sides” of coverage. Side A coverage, which I’ve expanded on already, covers your executives when the company can’t. Side B coverage reimburses a company when it pays for a director or officer’s legal defense costs. And Side C protects public companies from shareholder lawsuits (but more on that in this article).

As you’ve no doubt guessed, this article will focus on anything and everything Side B related.

What Is Side B Coverage?

So let’s break apart the jargon-filled mess that is Side B coverage. In a nutshell, Side B is the part of directors and officers insurance that reimburses a company when it advances money to cover legal defense costs of one of its executives. Legal costs can be anything from court fees to judgments.

Side B Versus Sides A or C

This is quite a bit different from Side A — and massively different from Side C.

Side A coverage provides funding for legal costs directly to those directors and officers when the company can’t (or won’t). Side C is less of a protection for officers and directors (despite falling under the D&O umbrella…it’s lovely, isn’t it?) and instead protects the company itself when it’s been sued, usually related to securities cases.

When Is Side B Coverage Triggered?

Your company can file a claim as soon as it has paid for any legal defense (or settlement) of one of its directors or officers.

Keep in mind that you’ll have a significant deductible — well, technically, it’s a “retention” — to pay before any Side B coverage kicks in. So, if you have a case with costs of $15,000 and a retention of $100,000, you may not need to (or even wish to) file a claim. Still, it can be useful to file early (even before hitting your retention limit) so your insurance company can be prepared to reimburse you as soon as your costs go higher.

What Does Side B Cover?

Side B coverage will reimburse your company for legal defense costs, settlements, and judgments for directors and officers, but what does that actually mean?

Here are some commonly covered legal defense costs:

• Attorney fees
• Court filing fees
• Expert witness fees
• Deposition and discovery costs
• Administrative and case management costs

Beyond these expenses (which can be considerable all on their own), your company’s Side B coverage will also reimburse payments made to resolve lawsuits without a trial, any negotiated agreement with a plaintiff to avoid court, and any court-ordered payments coming from civil lawsuits…provided that they’re not related to illegal activity like fraud.

Side B Coverage Exclusions

Like any type of insurance, there are things that D&O Side B coverage will flat-out refuse to cover. These are always outlined in your company’s policy document, so if you have questions, reading the fine print is a good idea. (To be more specific, reading the fine print is always a good idea when you’re dealing with insurance.)

First up, criminal acts are virtually always excluded from coverage. This includes fraud (which often gets listed separately, but, hey, it’s illegal too). You’ll need to be careful if something illegal is alleged of a director or officer; if the court finds them guilty (or they admit guilt), your insurance won’t reimburse you anything. And what’s more, anything they’ve already paid out will likely need to be paid back to the insurer through what’s known as a clawback provision.

Second, acts of intentional wrongdoing are also generally excluded. This doesn’t have to be something illegal (though it can be!), but if a director/officer consciously makes a business decision or takes an action that goes against the company’s best interests, it’s pretty unlikely your policy will reimburse your company for any legal costs.

There are also exclusions focused on personal profit motives. For example, if an officer or director engages in self-dealing (say, approving a business deal that benefits another company they have financial ties to), any legal action wouldn’t be covered by the D&O insurance. A lot of times these actions may also be illegal (so, already covered under criminal acts), but actions that are unethical or improper may also be excluded.

One major area that your company’s D&O insurance won’t cover involves things typically covered by other insurance policies — namely bodily injury and property damage.

Finally, any pending legal actions or prior litigation won’t be covered by a new D&O policy. When you find out there’s a lawsuit being filed, you can’t just run out and pick up some D&O insurance to cover your costs. A policy won’t cover anything that happened (or started to happen) before its effective date.

Impact of Exclusions on Reimbursement

Depending on how the exclusion manifests, it can have serious impacts for how a lawsuit affects your officers and directors (or, specifically in the case of Side B, the company itself). If the company is indemnifying its directors and it turns out something illegal happened, the insurer won’t cover anything more to do with that case — and you’ll usually need to pay the insurance company back for any funds it had already paid out. And if the case is in murky territory at best, expect potential delays in company reimbursements while the insurer investigates the claims.

Choosing the Right Side B Coverage for You

There’s no perfect policy for everyone, and finding the “right” amount of Side B coverage means you need to look at a number of factors.

For starters, you should have an idea about your company’s exposure to legal risks, and understand what your claims history looks like. Factor in how risky your industry is, too, and you should have a reasonably good idea of how a D&O insurer will look at your company — even if you can’t (really) change any of these.

Next, you’ll need to figure out what your company’s financial capacity is. And what I mean by that is directly related to retention amounts and limits and how they impact your premiums. For example, if you have a policy with a very high retention (say, $250,000) and somewhat low limits, this will translate into cheaper premiums. Cheaper premiums can be a dangerous goal, though, because if your coverage isn’t sufficient, you’ll likely pay far more should the worst happen.

Once you’ve got a handle on these two areas, it’s time to review and compare D&O policies. One really important thing: Many insurance companies weigh risks very differently, and so the same policy may have drastically different premiums, depending on the insurer you work with. If you go to a single insurance company, you may never know about it and be essentially leaving money on the table.

Why Side B Matters (a Lot) in Your D&O Insurance

It’s really important to get your Side B coverage right within your overall officers and directors insurance policy. Side B is triggered more frequently than A or C, and because it reimburses the company for its expenses (on behalf of its officers and directors), not having the right policy in place can directly impact your bottom line.

If you’re looking for a new or better D&O policy, be sure to talk to our team at Janover Insurance Group. We work with a wide network of top-rated insurance carriers to make sure you have access to the best, tailored policies for your business’s needs. Get a free quote from us today.