Why Public Companies Need Side C D&O Insurance Coverage

By Jeff Hamann

What Is Side C Coverage?

The Side C coverage of your D&O (or directors and officers) insurance policy is something that doesn't actually protect your company's directors and officers. Sounds strange, probably (and it admittedly does to me, too, a bit).

Side C covers legal liabilities that public companies directly face. For example, in securities-related cases, the defendant is generally the entity or company itself, not any of the officers or directors. These cases get expensive — fast — so having solid coverage is imperative in making sure your company can weather the expenses as they add up.

When Does Side C Coverage Apply?

Side C only applies when the company itself is sued. This is nearly always relating to securities claims like class action lawsuits from shareholders, but there are other circumstances that can also be covered. Your company's Side C coverage is used to directly cover legal defense costs and any related settlements.

Common Types of Claims Covered by Side C

First up (and most common) are securities-related lawsuits. In other words, when a group of shareholders sues a company for issues around its stock or any financial disclosures. Accusations of misleading financial statements, fraud, insider trading…these all would fall under this category.

Lawsuits from merger and acquisition disputes may also be covered under Side C. This usually kicks in if the company is sued for misrepresenting itself (or for other unfair practices).

Finally, any direct lawsuit against the company for anything related to a breach of fiduciary duty or a governance issue that doesn't target any individual directors or officers would potentially be covered. If the suit does go after an officer or director, this would generally be covered under Side A or Side B.

What Costs Does Side C Cover?

Side C coverage indemnifies your company for legal defense costs and any settlement or judgments against the company — so long as nothing illegal is proven or admitted. If there's any illegality, expect to have your claims denied and to need to reimburse the insurance company for any funding already provided.

But if everything's legal, here's what you can expect your Side C part of your D&O policy to cover:

1. Attorney fees
2. Court filing fees
3. Expert witness fees
4. Deposition and discovery costs
5. Administrative and case management costs

Plus, of course, any settlements or judgments. Again — sorry to keep repeating myself — only if nothing illegal is discovered.

Exclusions in Side C Coverage

As you no doubt have read earlier, illegal acts won't be covered by Side C. There are some other exclusions, though. Here are some of the most common:

1. Claims around breaches of contract involving the company
2. Bodily injury or property damage (that's covered by your property insurance!)
3. Prior acts (in other words, things that happened before your policy started)

Choosing Appropriate Limits for Side C Coverage

If your company is public, it's not really a matter of if you need Side C coverage, but more a matter of how much coverage you actually need. Naturally, the higher your coverage limits, the higher your premiums. So what should you do to figure out what's right for you?

First things first, look at your company. How large is it? Have similar companies in the same industry been subject to securities lawsuits frequently? What does the average settlement look like? All of these are questions you should ask yourself, but don't forget to ask yourself how much coverage you can afford.

Second, you need to consider your retention tolerance. Your policy's retention is what you might think of as a deductible. For smaller public companies, this may be somewhere in the ballpark of $50,000 to a couple hundred thousand dollars. Until you meet this retention, all the costs will be your responsibility to bear alone. If you choose to go for a lower retention, your premium will generally be higher, of course.

Finally, you really need to talk to a broker who is an expert in public company insurance. There's no substitute for this step. If you try to take your own requirements to an insurance company or two, you'll likely be guided toward a policy, but it probably isn't the best-suited one for your company's needs and risk profile. Talk to us, and we'll connect you with the exact tailored policy for your needs.