D&O: Importance of Side A Coverage

Non-indemnifiable loss

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, rather than side B or side C coverage refers to coverage for directors and officers that have not been indemnified by the organization. While it’s common practice for an organization to indemnify its directors and officers, that isn’t always possible. It could be that the company is facing insolvency and doesn’t have the resources to indemnify the individual directors. It could also be that the organization is legally not allowed to do so.

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 normally her organization would hold her harmless for this claim and pay the defence and damages. This would be what’s referred to in the D&O world as Side B coverage. 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.

Read more about what’s in a D&O policy here.

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