Why a Side A Policy Might Be Right for Your Board
The business world is fraught with challenges and uncertainties that can leave directors and officers (D&O) exposed to significant personal liability. This exposure arises from a number of sources, including shareholder lawsuits, penalties imposed by regulatory agencies and accusations of misconduct.
Directors and officers, who are often at the helm of guiding their companies through turbulent waters, need robust protection to shield their personal assets from these potential claims. This is where Directors and Officers (D&O) insurance policies can offer valuable protection, offering a safety net against a variety of risks.
In this article, we will explore why a Side A policy might be the right choice for your board members.
What is a Side A insurance policy?
A Side A insurance policy is a type of D&O insurance designed to protect individual directors and officers when the corporation is unable or unwilling to indemnify them.
Side A insurance exclusively focuses on the personal liability of directors and officers.
This means that in cases where the company cannot provide indemnity for their directors, Side A insurance steps in. It will usually cover the personal defence costs, settlements or judgments against directors and officers.
When does side A coverage apply?
Side A coverage comes into play under several scenarios where a corporate indemnity is not available. These include:
Corporate insolvency
When a company faces bankruptcy or severe financial distress, it may not have the resources to indemnify its directors and officers. Side A insurance ensures that these individuals are still protected despite the company’s financial incapacity.
Legal restrictions
There are instances where laws or corporate by-laws prohibit the company from indemnifying directors and officers. In these instances, Side A insurance can provide important coverage that the company cannot legally offer.
Refusal to indemnify
In certain situations, a company may choose not to indemnify its directors and officers, for example as a result of internal conflicts. Side A insurance provides an independent layer of protection, ensuring that directors and officers are covered regardless of the company’s stance.
Examples of D&O Claims that Side A Protects
Directors and officers of corporations face a variety of risks that can result in significant personal liability. Even when acting in good faith and making decisions they believe are in the best interest of the company, directors can still find themselves the targets of lawsuits and regulatory proceedings.
Without adequate protection, the financial and reputational consequences can be severe. The following are examples of they types of D&O claims that highlight the importance of Side A protection.
Shareholder actions
Shareholder actions are one of the most common sources of claims against directors and officers. These lawsuits can arise from allegations of mismanagement, breaches of fiduciary duty, or failure to disclose material information.
For instance, if shareholders believe that the board’s decisions have led to financial losses or diminished shareholder value, they may file a lawsuit seeking damages.
Side A insurance protects directors and officers by covering their defense costs and any settlements or judgments – ultimately safeguarding their personal assets.
Regulatory penalties
Directors and officers are also at risk of penalties imposed by government entities. These penalties can stem from violations of securities laws, environmental regulations or other compliance issues.
For example, if a company is found guilty of violating environmental laws, the directors and officers may be held personally liable for the penalties.
In Ontario, the Environmental Protection Act, RSO 1990, c E.19 imposes a duty on directors to take reasonable care to prevent their corporation from committing environmental offences. There is strict liability for harm arising as a result of a breach of this duty, and directors can be personally liable.
Side A insurance provides coverage for these penalties, ensuring that directors and officers are not financially devastated by such claims.
"Bad faith" acts by directors
Fraud, self-dealing, or other intentional misconduct. These kinds of “bad faith” allegations can lead to costly litigation.
Even if directors believe their actions were in the best interest of the company, they can still face lawsuits alleging bad faith.
What is the difference between sides A, B, and C insurance?
Understanding the differences between Sides A, B, and C insurance is essential for selecting the right coverage for your board. Each type of coverage serves a different purpose and addresses different aspects of D&O liability.
Side A vs. Side B
As noted previously, Side A insurance provides direct coverage to individual directors and officers when the company cannot or will not indemnify them.
Side B insurance reimburses the company for the costs it incurs in indemnifying its directors and officers. This means that when the company pays for the defense costs or settlements on behalf of its directors and officers, Side B insurance steps in to reimburse the company for those expenses.
The key difference between Side A and Side B insurance is that Side A directly benefits the individual directors and officers, while Side B benefits the company by reimbursing it for indemnification expenses.
Side A vs. Side C
Side C insurance, also known as “entity coverage,” protects the company itself against securities claims brought against the company as an entity. This type of insurance covers the company’s defense costs, settlements, and judgments arising from securities-related lawsuits.
The key difference between Side A and Side C insurance is that Side A focuses on protecting individual directors and officers, whereas Side C is designed to protect the company as a whole.
While both types of coverage are crucial, Side A is important for ensuring that directors and officers have personal protection that is not dependent on the company’s financial situation or willingness to indemnify.
You can read a comprehensive explanation about the difference between Sides A, B and C here.
Buying a “standalone” Side A D&O Insurance Policy
Board members often have the option to purchase a standalone Side A policy or combine it with Sides B and C.
The primary advantage of a standalone Side A policy is the access to broader coverage and fewer exclusions compared to a combined ABC policy. Due to this enhanced coverage, Side A policies are often referred to as “Difference in Conditions” (DIC) policies.
Many companies opt to have both a standalone Side A policy and a combined ABC policy to mitigate the risk of insolvency. Directors and officers relying solely on an ABC policy may end up uninsured in certain scenarios.
Standalone Side A coverage, however, can sometimes respond at ‘first dollar,’ meaning the insurer covers costs upfront without requiring the company to pay out first and seek reimbursement.
Additionally, without Side A protection, directors or officers might have to pay a substantial “Side B self-insured retention” before a Side B policy responds.
Consulting with an experienced insurance advisor can help ensure your organization obtains the appropriate level of Side A coverage.
Looking for more information about side A D&O insurance?
Deciding which D&O insurance policy to purchase for your board can be challenging. Selecting the right D&O insurance policy is crucial for protecting the personal assets and peace of mind of your board members.
Engaging an experienced insurance broker can make all the difference in ensuring you have the most appropriate and comprehensive coverage. Reach out to an insurance consultant today to evaluate your specific needs and determine the right D&O insurance policy for your board.
With professional advice, Axxima can confidently safeguard your directors and officers against the myriad risks they face, ensuring that your organization is well-prepared.
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