How Does D&O Insurance Work?
Directors & Officers (D&O) Insurance policies are complex and can be confusing for any executive — but it’s well worth taking the time to understand your policy In order to protect the directors and officers of private or public companies for alleged wrongful acts, D&O insurance policies consist of multiple insuring agreements. These are known as Side A, Side B and Side C.
We break down a typical Directors and Officers insurance policy structure to step you through the three insuring agreements so you can proceed with confidence knowing how the policy should be structured to protect the Board of Directors or the company.
What does Directors and Officers Insurance Cover?
Claims of mismanagement or breaches of a company’s fiduciary duties are covered by D&O insurance. These legal actions or investigations of wrongdoings are typically brought by shareholders, employees, regulators, creditors, competitors, liquidators. D&O Insurance can also be extended to provide entity coverage against employment practices liability and statutory liability.
A D&O insurance policy is a second line of defence to indemnification and typically forms part of a corporation’s full indemnity program. Regardless of whether the corporation defends the directors and officers or not, D&O insurance is there to protect the directors if they face any lawsuits. Common payouts from D&O insurance cover the losses associated with monetary demands such as defence and settlement costs.
D&O Insurance Policy Structure
D&O policies are typically structured with three available insuring clauses:
Here’s what a typical D&O policy structure looks like:
Side A Coverage – Directors & Officers / Insured Persons
Side A coverage exists to protect the directors and officers of a company if they face personal liability risk when company indemnification is not available to them. The sole purpose of Side A policy is to protect the personal assets of directors and officers and not the corporation. This insuring agreement is the final protection should the company be unable to indemnify its director or officer itself. It’s worthwhile noting that there is no deductible with Side A coverage.
Side B Coverage – Company Reimbursement
If the corporation is able to indemnify its directors or officers, then Side B coverage provides the company reimbursement for its expenses in doing so. Side B coverage acts as a form of balance sheet protection to the company. It enables companies to transfer their responsibility for certain liabilities and costs to the insurer under a deed of indemnity between the company, and its directors or officers.
It’s important to note that Side B coverage comes with a ‘deductible’, also referred to as an excess.
Side C Coverage – Entity Coverage
Side C coverage offers insurance protection for the entity’s own liability. Many insurance providers do not offer this cover due to high claims history over recent years.
Australia’s ever-increasing regulatory system, and most recently the unpredictable impacts of COVID-19, have seen corporations operating in an environment with frequent regulatory change and increased regulatory oversight. The rise in Royal Commissions and public awareness has also brought about heightened community scrutiny, which opens more windows of opportunity for claims and investigations brought against not only directors and officers but claims specific to securities law against the company, too.
It’s important to note that the scope of protection that Side C offers is different between policies that are for private companies and those for publicly traded companies.
For private companies, Side C coverage provides entity coverage for lawsuits against the corporation itself. This also includes not-for-profit organisations or strata corporations such as homeowner associations. Publicly traded companies however benefit from Side C coverage’s protections for its own liability arising from securities claims.
The company would then make a claim under its D&O policy, where Side C would cover the expenses associated with defending itself throughout the class action. This helps protect the entity’s balance sheet.
Directors and Officers Insurance Exclusions
Directors and Officers exclusions can be categorised into two types — Standard Exclusions that are built into the policy wording and Customised Exclusions that are endorsed onto the policy by insurers.
It is crucial to understand your Directors and Officers policy and its specific exclusions. Insurers underwrite all public company Directors and Officers policies, and they will add customised exclusions as they deem fit. It is important to understand what these exclusions mean and if there are any reporting requirements.
The complexity, intricacy, breadth and scope of D&O insurance policy structures call for specialist guidance regarding your risk management. At KBI, we have placed Directors and Officers Liability Insurance for over 300 public companies throughout Australia, Asia and North America. Our experience with not-for-profit organisations and private companies is also reputable. We offer tailored D&O insurance policy structures to suit your individual needs.
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*The Content is for informational purposes only, you should not construe any such information or other material as financial, or other advice. This information is general and does not take into account your objectives, financial situation or needs. When considering the purchase of an insurance policy, you should consider whether the advice is suitable for you and your personal circumstances. Before you make any decision about whether to acquire a certain product, you should obtain and read the relevant product disclosure statement.
KBI is a boutique insurance brokerage with a focus on Directors’ & Officers’ insurance. Our team has placed Directors’ and Officers’ Liability Insurance for over 300 public companies in Australia, Asia, North America and Europe, including the ASX, TSX/TSX-V, SGX, LSE, Nasdaq, NYSE and LSE/AIM. Our team consists of senior brokers, lawyers and past ASX listing advisors. We add value to the process by helping our clients make an informed decision during the purchasing and claims process. We also continue to provide updates to our clients, so they are properly informed on the ever-changing landscape of Directors & Officers insurance.