ASIAN ALLIANCE RISK SERVICES TAIWAN
- Property Damage Insurance
- Marine Cargo Insurance
- Product Liability Insurance
- Commercial General Liability Insurance
- Directors and Officers Liability
- Construction/ Erection All Risks (Car/Ear) Insurance
A Director and Officers policy (frequently called D&O Insurance) is appropriately characterized as a form of Errors and Omissions coverage for the professional managers of company affairs and others who, while acting in their capacity as officers, function in various roles to achieve the objectives of the company. The policy is designed to respond to claims seeking relief based on allegations of company mismanagement, breach of duty, error, omission, or other acts of the Directors or Officers when acting in the capacity as such.
D&O policies generally provide coverage against third-party litigation and typically provide for payment of defense costs as part of the limit of liability. D&O policies are ordinarily obtained by the company, which pays the premiums and to which the policies are issued. Public company D&O policies typically have three basic insuring agreements, often referred to as Side A, Side B, and Side C.
Side A
Side A is the coverage that applies when the company cannot indemnify directors for claims against them. A company cannot indemnify its directors and officers if it is insolvent. In most cases, it also is not permitted to indemnify directors or officers for settlements and judgments in derivative actions (lawsuits brought on behalf of the company against the directors or officers). Even the attorney’s fees spent in defending such a derivative lawsuit may not be indemnifiable if a director or officer is ultimately adjudged liable to the corporation. In those instances – that is, where the company is bankrupt or where indemnity is prohibited by law - a director would look to Side A coverage for protection.
Side B
Side B coverage, on the other hand, is really a form of company coverage. Under Side B, the insurer reimburses the company for the expense of indemnifying its directors or officers as a result of claims made against them. Thus, while Side A operates a personal asset protection for the directors and officers, Side B operates as balance-sheet protection for the company.
Side C
Side C coverage insures the company for claims made directly against it, commonly referred to as “entity coverage”. In public-company D&O policies, the company is usually only covered for securities law claims, i.e., suits brought by a shareholder against the company in connection with the purchase or sale of securities. In contrast, Side A and B are not limited to claims brought by shareholders, but instead, subject to exclusions, cover claims based on a variety of acts committed by a director or officer in his or her capacity as such.
In the last few years, a number of companies have begun adding a stand-alone Side A policy to their insurance programs. As noted above, Side A covers directors or officers for nonindemnifiable claims (when the company is insolvent or not permitted to indemnity, such as for settlements and judgments in derivative lawsuits).
There are a number of advantages to a stand-alone Side A policy. Since a traditional policy combines Side A, B, and C, there is always a danger that the limit of the policy can be exhausted-that is, used up in paying claims if claims against the company or indemnifiable claims are paid before non-indemnifiable claims. In contrast, if a company has a stand-alone Side A policy, the policy can never be used to cover claims against the company or to reimburse the company or the cost of honoring its indemnity obligations. The stand-alone Side A policy is coverage dedicated to those instances in which indemnity is not available.
If a company files for bankruptcy, a bankruptcy trustee may seek to freeze the policy, claiming that the policy proceeds are in asset of the estate. This risk is particularly acute where the policy provides Side C coverage (i.e., protects the company for claims made directly against it). If the trustee is successful in making such a claim, directors may find themselves without the D&O policy just when they need it most.
