Most companies today understand the need for Directors & Officers (D&O) liability insurance, but most are not aware of the need for Side A Difference in Conditions coverage. Private company D&O liability insurance is designed to protect directors, officers, employees and the corporation from claims alleging breach of duty with respect to the governance of the company. This is very different from Commercial General Liability and Errors & Omissions insurance which protects the corporation and management from claims arising out of the normal activities of the company.
What Does Traditional D&O Cover?
In order to properly discuss the need for a Difference in Conditions (DIC) policy, which is designed to fill in a coverage gap on a primary policy and broader than a standard excess policy, let us briefly explore the components of a typical D&O policy. The traditional D&O form is written in three parts:
1. Side A (Personal Asset Protection for D&Os) – responds when a company is unable to indemnify its directors and officers and a source of potential gaps. Essentially provides the final layer of protection for an individual director’s or officer’s personal assets from the plaintiff(s) in a claim.
2. Side B (Corporate Reimbursement) – reimburses the corporation for its indemnification obligation to its directors and officers.
3. Side C (Entity Coverage) – coverage for the corporation whenever it is sued along with the D&Os; covers any defense costs and/or judgments or settlements that are attributed to the company’s separate alleged liability.
The Need for Side A DIC Coverage
The costs of defending a claim against a director or officer can be substantial, even if the claim is a meritless one. Additional coverage is useful to attract and retain qualified board members because there is a sense of added security when there is a policy to back up the organization’s promise to indemnify. Companies may often indemnify their directors and officers in such claims, but the personal assets of the director or officer must be used to pay these costs and settlements if: 1) the corporation is not legally permitted 2) is not financially able or 3) simply refuses to indemnify the director or officer.
- Side A DIC coverage provides limits in excess of the D&O policy, but more importantly it will drop down and pay first dollar and defense costs when no coverage is available under the underlying D& policy.
Attractive Advantages to Most Side A DIC Coverage Forms
- Coverage will apply without any deductible, regardless of the circumstance that the DIC policy was triggered
- No pollution exclusion
- Limited ‘insured v. insured’ exclusion
- Less restrictive ‘personal profit’ exclusion with final adjudication language
- Non-cancellable once premium is paid
- Broad definition of insureds
- Dedicated limits
Give Your Directors &a Officers the Protection They Need
It is clear that certain situations may arise where your Directors & Officers need additional coverage to protect them from many situations. It could be that the company is simply unable to provide financial support either due to a law or financial inability. Side A DIC can be a powerful retention tool and it provides peace of mind so your key people can focus on growing your business.
For more information, please contact us.
Author: Corbin F. Wade, MBA, CIC, PWCA
Corbin F. Wade, MBA, CIC, PWCA
Vice President | HUB International