Key Coverage Elements of Directors and Officers (D&O) Insurance

Expenses that are made to compensate for disadvantages suffered or restrictions.

Directors and Officers (D&O) Insurance is a type of liability insurance that covers individuals serving as directors and officers for their actions related to the performance of their duties in their corporate roles. This insurance can protect the company, its directors, and officers from potential financial losses. Understanding the key coverage elements of D&O Insurance is crucial for anyone involved in the management of a company.

Side A, B, and C Coverages

D&O policies typically include three types of coverage, often referred to as Side A, B, and C.

• Side A Coverage: This provides direct indemnification to directors and officers, protecting their personal assets when the company cannot indemnify them. This situation might arise if the company is insolvent or if corporate law prohibits indemnification.

• Side B Coverage: This reimburses the company for costs it has incurred while indemnifying its directors and officers. Essentially, it protects the company's balance sheet against losses arising from legal actions against its directors and officers.

• Side C Coverage: Also known as entity coverage, this protects the company itself when it is named as a defendant in a lawsuit.

Policy Exclusions

Like any insurance policy, D&O policies have exclusions. These are specific situations or actions that the policy does not cover. Common exclusions include fraud, illegal remuneration, and personal profiting. Knowing these exclusions can help directors and officers understand the boundaries of their coverage.

Retentions and Limits

D&O policies typically include a retention or deductible, which is the amount the insured company or individual must pay out-of-pocket before the insurance coverage kicks in.

The limit of liability is the maximum amount the insurer will pay for covered losses during the policy period. It's important to understand that defense costs can erode the limit of liability, potentially leaving less money available to pay any settlements or judgments.

Claims-Made Basis

D&O policies are typically written on a claims-made basis, meaning they cover claims made during the policy period, regardless of when the wrongful act that gave rise to the claim occurred. This is different from an occurrence policy, which covers claims arising from incidents that occur during the policy period, regardless of when the claim is filed.

Understanding these key coverage elements can help you navigate the complexities of D&O Insurance and ensure that you, as a director or officer, are adequately protected.