Sides A, B & C of a D&O Insurance Policy: What You Need to Know
D&O insurance policies are complicated, especially given the various forms of cover (Sides A, B and C), and it’s important to understand what each cover offers. Below, we will explain the different ‘Sides’ in detail, and how each of them affects your organization.
Directors & Officers’ (D&O) insurance policies provide critical liability coverage for any organization, no matter its sector or size. They are designed to respond to losses that arise when directors and officers make errors in performing their duties.
If a director or officer makes a mistake, then third parties such as clients, shareholders and suppliers may commence legal proceedings against the organization. Legal fees to defend those proceedings and the costs financial settlement may be incurred. D&O is specifically designed to cover these losses.
Coverage within most D&O policies are divided into three different types – Sides A, B and C. In the table below, we’ve summarised each, and how they differ from one another.
Summary of Coverage – Sides A, B & C
Type of cover
Financial losses experienced by D&Os
Financial losses incurred by an organization indemnifying a D&O
Liabilities incurred by an organization sued alongside D&Os
Publicly traded organizations (securities claims only)
Private organizations (all-risks)
Type of losses covered
Generally, these policies will cover legal fees, settlement payments, court judgments and other financial losses when an insured is liable for:
- Breach of duty
- Breach of fiduciary duty
- Failure to comply with regulations
- Reporting errors
- Creditor claims
Most D&O policies will exclude:
- Intentional fraud
- Criminal activity
- Directors and officers bringing claims against one another
Side A offers liability coverage for directors and officers when an organization is unable or unwilling to indemnify them. That is, this side of cover is designed to protect the personal assets of a director if they incur financial liabilities and their organization is not prepared to bear the costs themselves. Note that this is not a policy taken out by directors or officers – it is a policy taken out by the organization to protect its directors and officers from financial losses.
The most common reasons for the inability to provide an indemnity is the bankruptcy or the insolvency of the organization, or a legal barrier preventing an organization from indemnifying the director or officer. In other words, if a company files for insolvency and cannot pay any claims on behalf of their directors, a D&O Policy (Side A) would pay out the claims.
Similarly, if a third party commences legal proceedings against a director or officer personally, whether that be for their wrongful act, breach of duties or mistakes, a D&O policy’s Side A cover will generally pay these legal costs.
How Inflation Affects the Insurance Market
Without Side A D&O liability coverage, an individual director or officer could be personally exposed to significant legal costs. This could include the costs of paying for an attorney, court judgments or settlement payments. Their own personal assets, including their homes and any other property they have, would be at risk.
There may be a sentiment that directors and officers, who are often well-paid, should be able to protect themselves, but without a Side A policy, organizations may find it challenging to retain the best talent for their corporate governance operations. Experienced and talented directors will look to see if an organization will cover them for mistakes and may choose the one who has a robust D&O insurance policy to grant them peace of mind if they have no indemnity.
Case Example: Director Liability for Cyber Incidents
Over the past few years, cyber risk has taken centre stage especially as more and more employees are working remotely. In the United States, there have been several lawsuits against directors and officers relating to cyber incidents. In January 2019, one lawsuit settled for US$29 million over various breaches of Yahoo! accounts.
Civil actions against directors are rising in popularity and, as such, it would be wise for organizations vulnerable to cyberattacks to consult with an insurance specialist to ensure that their leaders are protected.
Side B is also known as corporate reimbursement coverage. This is because it reimburses organizations for the liability incurred as a result of the need to indemnify directors and officers for wrongful acts.
If an organization incurs costs because of the actions (or inactions) of their directors or officers, and they need to indemnify them, they can make a claim to the Side B cover of their D&O policy to be reimbursed.
This type of policy is popular amongst organizations due to an increasingly complex regulatory environment. Companies and boards are often pressured to make decisions rapidly in uncertain landscapes. The industries in which they operate can also be high-stakes – the medical and financial industries being prime examples. Boards can therefore be prone to make mistakes, execute a decision based on poor or outdated data, or fail to notice a detail or a particular piece of information that should have been picked up on. This can result in claims being brought by government regulators, shareholders, consumers and other third parties who have suffered loss as a result of those actions or inactions.
What if an organization doesn’t have Side B liability coverage?
Without Side B D&O insurance, organizations can face high levels of financial cost when defending themselves in a lawsuit because of something an individual officer has or hasn’t done. This is because organizations will find themselves needing to indemnify their directors for their actions, only to be left out of pocket with inability to claim the costs of their indemnity.
Caution: it is critical to ensure that your indemnity agreements ‘match up’ with your Side B D&O policy. For example, most Side B D&O policies do not cover costs associated with a director who has committed intentional fraud or criminal activity. In the unlikely event that your indemnity policy covers losses associated with this activity, you may find that you are not covered under Side B.
Side C is also known as “entity coverage”. It offers liability coverage for organizations who are sued along with their directors and officers. This area can become complicated, because this form of coverage draws a distinction between publicly listed companies and private organizations.
If your organization is private (i.e. not listed on a securities exchange), then you will generally be entitled to the benefits of an all-risks policy. This means that coverage will extend to all risks, unless a risk is specifically excluded.
If your organization is listed on a public securities exchange, then it will only be covered for security-related grievances. This is because there are unique risks when companies trade on the stock exchange.
Due to increased regulatory and community scrutiny, securities litigation is a significant exposure for listed organizations. In 2021, ten new securities class actions were filed in Canada and, in 2020, fifteen were filed. The eight-largest securities class action settlement was finalised in 2022, with the Canadian Imperial Bank of Commerce paying C$125 million to investors.
What if an organization doesn’t have Side C liability coverage?
Failure to have ‘entity coverage’ (i.e. a D&O Policy with Side C cover) will mean your company will remain exposed to lawsuits when directors are joined to proceedings brought against the company.
This is of particular concern for publicly listed companies on a stock exchange, who may be faced with significant legal costs for losses caused by their traded securities.
Case Example: Shareholder Actions
Across the world, litigation commenced by shareholders is on the rise, with the present state of Canadian securities laws exposing directors to loss personally. This is also true for oppression remedy claims, with the Supreme Court of Canada recently holding that directors and officers may be personally liable for such claims instead of the corporation.
While shareholder litigation is not as prevalent in Canada as it is in the United States, the risks of lawsuits are still real – with claims often brought for forced buyouts, oppression, share valuation disputes and breaches of fiduciary duty.
A qualified actuary can help you understand which D&O Policy (A, B or C) is necessary to protect your organization from shareholder activism.
Does your organization need D&O Insurance?
D&O policies may not be essential for every organization. It will largely depend on the type of enterprise you run, and the nature of your industry.
That being said, D&O should definitely be considered if a company has a board of directors. One Private Company Risk Survey found that, over the course of three years, 25% of private companies reported a D&O loss. Around 96% of those companies said they were negatively financially impacted.
If you operate a large commercial entity, a municipality or complex community-based organizations such as hospitals, then D&O policies are a must.
Benefits of a “standalone” Side A D&O Insurance Policy
Organizations can either purchase a Side A policy on its own (a standalone policy) or they can purchase it alongside Sides B and C.
The main benefit of a standalone Side A policy is that you can unlock the benefits of broader coverage, and fewer exclusions, than what is normally contained in a combined ABC policy. This is why you’ll sometimes see Side A policies being referred to as “Difference in Conditions” (DIC) policies.
Organizations will often combine the two together (i.e. have both a standalone Side A policy and a combined ABC policy) to account for the risk of becoming insolvent. Directors and officers who are only entitled to the benefits of an ABC policy may simply find themselves uninsured.
Traditional standalone “Side A” coverage is also useful because it can respond at ‘first dollar’ in some cases. In other words, corporate entities don’t have to rely on Side B and foot the bill of an indemnity and then seek reimbursement, because the insurer will pay costs up front.
Furthermore, if an organization without Side A protection refuses to indemnify a claim, that director or officer would often need to pay what is called a “Side B self-insured retention” before a Side B insurance policy responds. This could exceed millions of dollars in some cases.
An experienced insurance consultant can help your strategy to ensure your organization receives the right level of Side A coverage.
Is Errors and Omission and Employment Practices Liability Insurance the same as D&O?
Errors and Omission (E&O) and Employment Practices Liability Insurance (EPL) are different from D&O because they cover risks that arise in different circumstances.
Errors and Omissions policies insure losses that arise from the rendering of professional services. The loss may not necessarily be tied to the decision of an officer or a director as a fiduciary.
Employment Practices Liability Insurance covers claims made against people within the company – specifically, employees. These claims may involve discrimination, sexual harassment, wrongful termination, retaliation and other employment-related claims. The claim may not necessarily be related to a director.
It is important to understand the difference between these three types of policies so your organization can select the most appropriate coverage possible.
Not all D&O policies are the same
There are various forms of D&O policies, and all are uniquely crafted to fit the organization and the particular risks they face. Questions will arise such as whether the individual directors should be covered (Side A) or only your company should be covered (Side B), or both. This will also change especially if your organization is publicly listed (Side C).
It is always best to seek out a highly experienced insurance consultant to help you understand which D&O coverage is best for your organization. At Axxima, our team of insurance experts are here to help ensure you have the right coverage in place to protect your organization.
Give Axxima a call and we’ll help you obtain the right level of coverage – so that you can focus on your organization’s success with the peace of mind, knowing you are protected.