Why is Side A coverage on a D&O policy so important to directors and officers? Read below and watch the video to learn about what some call an ‘insurance of last resort’.
What is Side A coverage?
Side A coverage, protects directors and officers when a claim is made against them and the corporate cannot indemnify them. This may occur if indemnification is prohibited by law or because the organization is financially unable to provide it, such as during bankruptcy.
When does Side A coverage apply?
Let’s go through an example:
Imagine, Sally has agreed to sit on the board of a privately held energy company. The company is struggling. Sally and the other directors do what they can to revitalize the struggling company. The company has a number of assets. In order to get some quick cash the directors agree to sell many of these. Given their financial position the directors weren’t as bothered about getting market value for the assets. They needed cash very quickly so they accepted immediate offers.
A few months after the asset sales, with the company still struggling, a lawsuit was filed against Sally and the other directors. The lawsuit alleged that Sally and the directors were liable for disposing of company assets under their market value while not having the ability to pay their creditors.
Now, Sally has an indemnity agreement with her organization, so under normal circumstances the organization would indemnify her by paying her defence costs and any damages she is legally required to pay. The insurer would then reimburse the organization for those costs under the Side B insuring agreement of their D&O policy. Sadly this was not the case for Sally. The company was not able to indemnify her and the other directors as they had recently filed for creditor protection. Because Sally was named as a director on the lawsuit, she could be on the hook for the costs. If Sally’s organization had an insurance policy in place that provided Side A coverage, Sally would be off the hook.
Side A and policy limits
But what if the D&O policy in place had a $1M limit that had already been exhausted for other bankruptcy related claims or an employment liability claim? This is where an additional limit for Side A coverage, on top of the general policy limit, would be most helpful. An additional $1M limit for Side A coverage is a feature in some policies. However, you can also apply for additional coverage under a separate policy.
So you can see how Side A coverage can be a wise investment for directors and the protection of their personal assets.
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Learn about what’s in a D&O policy:
