Why ‘Side-A’ Is Critical if you’re a Director or an Officer

Side A Insurance BPJ

There are three parts to a D&O Policy—Parts A, B, and C. In recent years, exposure to Part A / Side-A risks have increased dramatically.

To protect themselves, anyone considering joining a board of directors should find out the extent the corporation will indemnify them for results of any decisions they may help make while serving. Indemnification is just a starting point, though. In order to attract the best talent for their boards, corporations (including nonprofits) should purchase the highest quality directors and officers insurance, perhaps including a “Side-A-Only” policy as well as a basic, traditional D&O policy.

The Three Parts of a D&O Policy

The typical D&O policy contains three parts. Let’s look at them to understand why Part A or “Side-A,” as it’s usually called, is the most important section of the policy for an individual director or officer.

Part C, or “entity coverage,” covers the corporation itself when it is named in a lawsuit or claim. Insurers began adding entity coverage to their D&O policies in the 1990s, in response to a spate of securities and employment practices liability lawsuits that named the corporation as a defendant along with the directors and officers.

Part B reimburses the corporation when it repays its directors and officers for legal defense expenses they incur resulting from their official duties. That is, when permitted by state law or as required by its corporate charter or bylaws.

Part A (or “Side-A”) covers directors and officers, reimbursing them directly for claims of liability that arise from their corporate duties.

The Advantages of “Side-A” Coverage

But why is Side-A needed if Part B exists to reimburse the corporation for paying claims on behalf of its directors and officers?

Doesn’t that imply that directors and officers are already covered by agreement with the company they’re serving? Not necessarily. Side-A coverage is vital in these three instances:

  1. When the corporation is financially unable to indemnify its directors and officers. This may occur due to the company’s bankruptcy or insolvency.
  2. When the directors and officers must pay a settlement or judgment in a shareholder derivative lawsuit. D&O policies exclude “shareholder derivative” lawsuits; otherwise the corporation would be reimbursing its directors and officers for the harm they were legally determined to have caused the corporation, creating a circular effect wherein the corporation is not actually made whole for its loss.
  3. When a claim is made against the directors and officers and bylaws, state or other laws do not require the corporation to provide indemnification.

Want to Super-Size that Side-A Coverage?

Beginning in the early part of the 2000s, exposure to Side-A risks became so great that there are now Side-A only policies (also called “Side-A DIC” policies). They are issued in conjunction with the primary D&O policy and exist to:

  • Provide “excess” (or additional) limits of coverage if the limits of the primary form are exhausted by claim payments and defense costs. D&O policies are written with one limit for all three parts; if policy limits are depleted by Part C “entity coverage,” there may be no funds left to pay other claims.
  • “Drop down” over primary forms, when an exclusion or other coverage restriction that would otherwise defeat coverage applies. For example, most traditional D&O policies may be rescinded if “inside” directors and officers (i.e., directors and officers who are also employees of the corporation) commit fraud. Traditional D&O policies also bar coverage when there has been fraud or concealment by a corporation’s CEO or CFO in providing information in the application for D&O coverage.

These exclusions do not appear in Side-A Only policies. To find out more about D&O insurance and how Side-A coverage helps protect the corporation and its directors from costly liability claims, please either call or email Barker Phillips Jackson at: 417-887-3550 or ins@bpj.com. Visit here to learn more about our Commercial Insurance policies.