A D&O Insurance policy is made up of many insuring agreements, which are usually referred to as Side A, Side B, and Side C. The goal of this article is to explain the benefit of D&O insurance by providing a description of each insuring agreement as well as a claim example.
Directors and Officers liability insurance is a policy meant to protect business directors and senior management from financial loss in the case of litigation, as we outlined in D&O Insurance Explained. The damages related with monetary demands, like as defense fees, settlements, or even penalties for improper conduct performed by directors and officers, would be covered by a D&O insurance claim.
We also said that the company may pay to defend the directors and executives in specific cases. In other circumstances, the company may not be able to pay it or may not be legally permitted to do so. Regardless, when litigation against the directors and officers emerge, the D&O policy protects the directors or the company.
The notion of indemnification is fundamental to the structure of a D&O insurance. Remember that a D&O insurance policy is only one part of a company’s indemnification scheme. It’s also part of a larger insurance and indemnification package.
We need to look at the structure of a D&O policy to understand how it reacts. The goal of Sides A and B of the D&O policy is to safeguard directors and officers at their core. The entity is covered by Side C, which is a newer coverage option.
Non-Indemnifiable Loss (Side A)
In the event that the company goes bankrupt or is legally unable to cover the directors and officers, this insuring arrangement kicks in. When this provision is used in response to a claim, the insurance policy reimburses the directors and officers for defense and settlement expenses, as well as judgements against them. These might include claims for breach of contract, negligence, or business-related lawsuits.
Here’s an illustration:
When a firm declares bankruptcy, it is placed under protection from creditors. To avert bankruptcy, the CEO has been entrusted with selling all of the company’s assets. The creditors bring a lawsuit against the directors and officers after all assets have been sold, claiming a violation of fiduciary responsibility. They claim the board of directors failed to manage the asset sale and negotiate the required contract to avert bankruptcy. The corporation would not be able to indemnify the directors in this case since the company was under bankruptcy protection. This implies that the directors would be covered directly by the insurance coverage.
The following are some key points to remember about this story:
- Only the directors and executives are insured on Side A, not the company.
- There is no insurance deductible on Side A.
- Additional Side A coverage is often available and should be considered.
Indemnifiable Loss (Side B)
Reimbursement for Businesses
The most often used coverage is Side B Coverage, also known as Insuring Agreement B. This is when the insurance policy reacts by reimbursing the company for defense expenses, settlements, or judgements incurred by its directors and officers. It’s important to remember that this coverage only reimburses the company up to the amount of indemnity paid to the directors (as opposed to covering the liabilities of the corporation). This is why D&O insurance is often described as corporate balance sheet protection.
A deductible applies to this policy.
This is how the coverage on Side B reacts:
Entity Coverage (Side C)
For publicly listed corporations, security claims coverage is provided.
The extent of coverage and scope of Side C insurance for private firms and publicly listed corporations are vastly different.
This is entity coverage, which would encompass lawsuits against private enterprises, not-for-profits, and even homeowners associations (strata corporations).
It’s worth noting that private corporations’ Entity Coverage may be rather comprehensive.This implies that a D&O insurance may provide coverage for situations like a government subpoena or inquiry demand.
A deductible applies to this policy. It is seen as a safeguard for the corporation’s financial sheet.
What is not covered under a D&O policy?
A D&O insurance does not cover risks that cannot be insured or hazards that are covered by other policies (such as professional liability or bodily injury property damage)
Claims for fraudulent or dishonest activities by directors or corporations, as well as willful breaches of the law, are not covered by a D&O insurance. This exclusion usually does not take effect until the illegal behavior has been ultimately judged by the courts. This implies that the insured will be represented until he or she is found guilty.
Prior known claims or circumstances pertaining to unlawful conduct that occurred before the insurance went into effect are not covered by a D&O policy.
To understand the insurance limit and deductible structure, read the policy statement like you would any other insurance policy. The insurance wordings spell out exactly what is covered and what isn’t. There’s also a part outlining the insured’s and insurer’s responsibilities in terms of claims reporting and management.