When is it Advisable to Purchase?
When you really look at the nuts and bolts of Side A D&O liability insurance, it may appear superfluous and redundant. Isn’t that sort of coverage already provided through standard corporate defense and damages indemnification?
Honestly, it’s a lot more complicated that it appears. The most important reason for a company to offer Side A liability insurance to potential directors and officers is that it just makes good business sense. Side A is a great carrot to motivate talented executives to join up with your firm. Their jobs involve quite a bit of risk, and their necks are on the line routinely with the choices they make. Side A fills in any holes that standard corporate indemnification may not cover. It serves as an incredibly convenient and important auxiliary.
Yes, this is all very nice, but really, what is the point? If side A is so redundant, why purchase it at all? Wouldn’t an intelligent executive be quick to realize that he or she did not need such puffery? Don’t the indemnification laws make coverage mandatory?
Actually, D&O indemnification is not as universal or mandatory as one would like to believe. Sure, for most actions it is permitted, but it’s not necessarily mandated except for a few cases… so in all actuality, firms and organizations are generally not legally compelled to indemnify. It actually makes sense, because defense costs, even when the charges or claims are baseless, are nearly always very expensive. Plus, there is the question of whether a firm’s action of appropriating and forwarding money to this end is permissible. Things in this regard can get quite complicated.
Sure, companies want to do everything that they possibly can in order to protect their existing heads and to attract new ones. Thus it would make sense for them to provide as much protection from lawsuits as possibly in their contracts. But a problem arises when equity shareholders or security holders of the company file suit as the body of the firm against the directors and officers. When the judgment comes in against the D&O’s, it is expected that these D&O’s themselves should pay whatever indemnity is ordered.
If the company were, in this case, to turn around and reimburse its D&O’s for the cash that they’d been ordered to pay up to them, it would end up being like a snake biting its own tail. Such a runaround is both imprudent and completely illegal in most states.
This is where insurance comes in. An insurer can provide defense costs to the insured, just so long as such insurance is specified on the policy. If need be, the insurance company will then look to the firm for reimbursement of the policy.
Another case where such insurance plays a key role is any such instance where there are no assets available for compensation. Whether this situation is due to legal reasons or the process of bankruptcy is not very relevant.
One more situation where Side A insurance would come in handy would be in the case where a company’s own regulations were severely revised once concerned D&O’s were already on board with the organization. If the regulations in question had anything to do with defense cost forwarding for D&O’s who’ve since left the organization, with concern for their activities when they had actually been serving, what is the policy?
We must look to the law for answers. The court case Salaman v. National Media Corp., 1992 WL 808095 (Del. Super. Oct. 8, 1992), states that “a board of directors cannot unilaterally terminate a former director’s right to advancement through a bylaw amendment while litigation is pending.” However, it can be a double edged sword. There is nothing that prevents the revision of said bylaws under any circumstances, and the bylaws at the time of the lawsuit are the ones that will be considered during the time of the lawsuit. Insurance policies like Side A, on the other hand, are not subject to such flux.
Going Beyond
Side A insurance comes in quite a few flavors, and is usually highly customizable from one organization to the next. One of the more popular of these varieties is called “excess” or “DIC” side A insurance coverage. This is usually purchased in addition to basic side A coverage, as part of a wholly different policy.
Excess side A is quite handy; perhaps even a godsend, under a number of different circumstances. In particular is the case where the basic D&O coverage is spread across the entire business, from top down. Should the business end up in bankruptcy proceedings, the court may seize the D&O coverage, stating that it’s a corporate asset. This would leave everyone without D&O coverage. In this case, excess side A would serve as invaluable stopgap for any individuals who might be covered under it.
With excess side A, the coverage is nearly always much broader and more specific than the primary policy upon which it has been architected. The number of exceptions and exclusions is generally quite small, and those which may be are named specifically. Custom excess side A policies are generally available for individual D&O’s who feel that they are under some kind of risk for a lawsuit from others sitting on the board. Generally speaking, reasons an individual might purchase or ask the company to purchase side A insurance would be when their primary policy excludes a situation for which the individual feels there is a substantial risk.
Any situation where the basic D&O coverage might be insufficient is a potential area where excess coverage might be a great bet. Most common are Bankruptcy, Shareholder or Intra-corporate lawsuits, or drop-down polity scenarios.
Greater Popularity… Greater Affordability
Side A D&O liability insurance has exploded in popularity in recent years. The resultant competition among insurers to provide this type of coverage has drawn quite a bit of attention. It also means that the policies have become both less expensive and broader in coverage. Now, side A D&O coverage is exceptionally popular, perhaps the most popular variety of D&O insurance on the market. As far as extensions go for this coverage, excess side A has gotten to be a hot commodity in itself. Customers are eager to get as much coverage as possible, and excess side A offers quite an abundance.
It’s Just Good Business
It makes sense that businesses and individuals would be attracted to D&O liability insurance. Businesses are not always able to follow through on promises, and contracts aren’t always as binding as they might initially appear to be. Directors and officers, both existing and potential, might be risk takers, but they don’t want to run the risk of personal ruin. Side A coverage is not just insurance, it is assurance as well for these executives, and the company which offers it to executives is likely to attract or retain them. Because it has become so popular, many businesses choose to do a little extra and offer excess side A. All in all, it just makes good business sense.
About Dumont Insurance Corp.
Dumont Insurance Brokers Corp. – renowned for the cumulative industry knowledge, experience and insight of its staff, its close attention to customer care, and its innovative, automation-tinged model – was developed with a unique system underwritten by the most trusted and highest-rated carriers. This unique equation allows Dumont to provide customers with the very best, and most cost-effective, professional liability and E&O coverage, in spite of the ever-increasing hazards of a litigious society.
