Directors and Officers Liability Insurance

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D&O insurance policies offer liability cover for company managers to protect them from claims which may arise from the decisions and actions taken within the scope of their regular duties. There are a wide variety of D&O insurance products and options available, but one of the most valued by individual directors and officers is the Side A insurance policy. Let us understand why.

CoverDescriptionWho is the insured?What is at risk?
Side AProtects assets of individual directors and officers for claims where the company is not legally or financially able to fund indemnificationIndividual officerHis/her personal assets
Side BReimburses public or private companies to the extent that it grants indemnification and advances legal fees on behalf of directors/officersCompanyIts corporate assets
Side CExtends cover for the public company (the entity, not individuals) for securities claims onlyCompanyIts corporate assets

Side A insurance provides direct coverage for individual directors and officers policy when the organization is legally unable or unwilling to indemnify its directors and officers. Among more common reasons for this failure to indemnify are

  1. Bankruptcy or insolvency of the organization
  2. The legal prohibition against indemnification

Without Side A coverage, if a claim situation were to arise, the individual directors and officers would be personally liable for significant legal expenses, judgments, and settlements. Moreover, without the benefit of a Side A policy, an organization may find it difficult to recruit, attract and retain the most qualified candidates for its operations and corporate governance.

Additional Read: What are Side A, B, and C covers in a D&O policy?

Let us understand the Side A claim process with the help of an illustration :

  1. A manager allegedly fails to perform his/her management role
  2. As a result, several internal and external people (claimants) decide to sue the manager
  3. The manager is informed about the claim (commonly through a legal notice)
  4. The manager contacts the legal department of the company and informs them about the claim
  5. The legal department intimates the claim to the insurer with relevant claim details
  6. If the claim is covered the insurer pays the defense cost as per the terms and conditions of the policy
  7. If the claim is covered and the case is lost the insurer covers the total loss resulting from court proceedings
  8. If the manager is not insured, he/she has to pay for the loss from his personal assets, which can result in acute financial distress for the manager.

Therefore an optimum D&O cover must necessarily include Side A coverage.