The ABCs of D&O: Addressing the Coverage Needs of Directors and Officers


By Chris Christian, CIC, RPLU

As the market for privately-held Directors and Officers Liability Insurance (D&O) continues to contract, it becomes more and more difficult to find quality coverage for the management liability and operational corporate conduct exposures of entities.

There’s no solution on the horizon for the entities, other than carefully poring over policy language and picking only the best forms. But there is a way to address the needs of the insured persons in a much more robust fashion than what we’re seeing in garden-variety, privately-held D&O policies. The solution is a Side A Difference in Condition (DIC) policy.

In order to understand how this policy works to protect the Insured Persons, let’s talk for a moment about the structure of a regular privately-held D&O policy. Although the nomenclature sometimes differs with certain carriers, and a few will lump these concepts together, a traditional privately-held D&O policy is structured as follows:

Side A

Coverage for non-indemnifiable losses of the Insured Persons. These are the claims that the directors (Ds) and officers (Os) must pay out of their own pockets, whether because the entity refuses to indemnify them, is unable to indemnify them, or is prohibited by law from indemnifying them. Keeping in mind at all times that Ds & Os are personally liable for their wrongful acts, you can understand how important it is to have coverage for this exposure.

Side B

Coverage to indemnify the entity for its indemnification of the Insured Persons. Contrary to the scenarios that give rise to the need for Side A coverage, in these claims, the Insured Persons’ defense and liability are indemnified (or paid on behalf) by the entity. Side B coverage then indemnifies the entity for those expenses (or pays on its behalf).

Side C

Coverage for claims made against the entity itself. This coverage defends and indemnifies the entity when a claim is made that it conducted itself inappropriately, so long as the alleged wrongful act does not properly belong under some kind of other insurance (such as general or professional liability, work comp, etc.), or is otherwise uninsurable.

Over time, carriers have loaded up exclusions on Side C; then they have bled over into Side A, such that there is sometimes virtually no coverage left in the policy. When I see one of those placements, I often remark that the insureds would get more value out of their money if they used their D&O premium to take their employees on a cruise.

There are two ways to obtain good, high-quality coverage for your Ds & Os in this situation:

  1. Purchase a Side A-only policy, and forget about the typical ABC format. Such a policy should not be burdened with the same kind of exclusions that have arisen due to the entity coverage on a privately-held policy. In fact, there should be only the smallest handful of exclusions, much like we see in publicly-traded forms; or...
  2. Go ahead and place the privately-held policy for what good coverage is in there, and then place a Side A DIC policy in excess of it.

The Side A DIC policy will provide coverage for the Insured Persons on a broader form than the privately-held form does. There are hardly any exclusions in a Side A DIC form, and although it functions as an excess layer with regard to when its limits will kick in, it does not follow form of the underlyer as to coverage. So it is both an excess layer in case the limits are exhausted, and acts as an umbrella in case the Insured Persons are faced with a claim that is excluded by the primary policy.

This is obviously a good solution for expanding coverage available to the Insured Persons. However, it can also be used to increase capacity more economically.

Side A DIC limits are priced a bit more aggressively than the primary, or even excess, limits for the whole ABC policy. So if your insured wants more limits for the Ds & Os, it makes sense to use a Side A excess policy (and I would always prefer to provide that on a DIC basis, versus follow form) to increase that limit, rather than increase the entire limit of a policy that also covers Sides B and C.

The challenge here is that you need to sit down with the insured and figure out the limit they want for the entity (which is also shared with the Ds & Os Side A, and the Side B reimbursement), and then how much they want to preserve just for the individual Ds & Os. Sometimes that’s just a bit more math than an insured will want to do. For the most part, though, especially if an insured has outside directors (ones that are not owners), the idea of having limits set aside just for the Ds & Os, and having those limits provide broader coverage than the underlying D&O policy, is an attractive one.

There is one other thing you’ll want to make note of when it comes to limits for the Insured Persons: most privately-held D&O policies worth their salt these days include (or can include upon request) an additional limit for the Insured Persons. For example, if you buy a $1MIL limit of coverage, there may be an additional 500K just for the Insured Persons. You would have an effective $1.5MIL total D&O limit.

If you’re only looking for capacity for the Insured Persons, and the form is all you hoped it could be, then this is a fine way to obtain a bit more limit. However, this increased limit in the policy is subject to all terms and conditions thereof, so if there is a flaw in the coverage that impacts the Insured Persons (which happens a lot more frequently than you would imagine), that flaw carries over to the Ds & Os special limit as well.

The moral of the story is: don’t be afraid to look to a monoline Side A DIC policy to expand and enhance coverage for Insured Persons, or to increase capacity. These policies bring great value to the table.

Learn More, Earn More

Executive Liability Insurance
Attend a James K. Ruble Executive Risk Seminar for an in-depth look at D&O, Employment Practices Liability, and Fiduciary Liability. For a basic overview, consider taking the four-hour online William T. Hold Employment Practices Liability Seminar. The National Alliance Research Academy’s book, Executive Liability Insurance, is a good reference source that devotes an entire chapter to the subject of D&O insurance.

After first working for an insurance agency and a carrier, Chris Christian eventually specialized in professional liability insurance. She joined U.S. Risk in 2005 where she continues her pursuit of the art and science of professional liability brokering, and contributes to the industry as a frequent speaker, author, and association participant. Chris is a Ruble faculty member.

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