D&O Insurance

D&O Insurance

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D&O 11 Feb 2020

Does your D&O policy really cover your personal assets at any time?

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Traditionally a D&O policy has two (Side-A and Side-B) or three (Side-A, Side-B and Side-C) insuring clauses applicable.

For those not in the know with the jargon,

  • Side-A or “non-indemnified” provides coverage to individual directors and officers when not indemnified by the corporation.
  • Side-B or “indemnified” provides coverage for the corporation when it indemnifies the directors and officers (corporate reimbursement).
  • Side-C “entity securities coverage” is mainly for Public Listed Companies and provides coverage to the corporation itself for securities claims brought against it.

Directors & Officers Liability Insurance, back to basics

In the last 10 years, Directors & Officers Liability Insurance (D&O) has evolved into a comprehensive insurance product in which numerous extensions in cover for both the company and its management have become standard. Next to the cover for the directors and officers, the so-called A-side part of the policy, is cover for the company itself in case it has indemnified its Directors and/or Officers for claims - the so-called B-side cover.

As a result of a soft insurance market in recent years, D&O premiums have taken a dive and some suggesting it has become a “commoditised” insurance product making it attractive for companies to buy higher insurance limits often linked to extension of covers such as litigation costs spread over various excess layers.

But what happens when the company enters bankruptcy and is not willing to indemnify its individual directors or officers as a result?

Although individual directors have to a certain extent ‘first right entitlement’ to the insurance policy, recent legislation such as the Imtech case, show that in practice there may be less contract certainty for such individuals than initially thought.

In complex claims including bankruptcy situations, alleged fraud or serious misconduct, the actual settlement could comprise multiple stakeholders involved in any (sub)settlements or multiple claims.

Moreover, ‘layered’ insurance programmes will create a panel of insurers with differing perceptions on the claim or reasons not to cover a claim such as their inception date on the programme and underwriting information disclosed at the time might be different.

Challenges of the market

  • The complexity of large multilayer D&O insurance programmes may result in unbalanced and incomparable covers being in place across the excess layers
  • If one of the insurers, especially the primary insurer, refuse coverage under the D&O insurance, the individual directors and officers need to proceed against their D&O insurers for indemnification for their defence costs.
  • In case of alleged deliberate fraudulent / criminal acts, insurers could refuse coverage in advance. This might be overruled in court, yet not a desirable scenario
  • Programmes including B-side cover with additional extension for securities claims (C-side), makes the company (as the policyholder) an important stakeholder in any settlement, or the liquidator in case of bankruptcy. Settlements with insurers negotiated by the company could be influenced by cover restrictions or create potential conflicts across the supervisory board or non-executives (who are or can still be future defendants).

The Geo D&O product Side ‘A’ Excess and Lead Difference-in-Conditions (DIC)

Geo Europe can provide more extensive coverage for individual directors and officers under a Broad Form Side-A Difference in Conditions (DIC) policy. 

The Side-A DIC part drops down to fill in gaps in a company’s D&O tower when any underlying insurer fails or refuses to pay, attempts to rescind coverage because of misrepresentation when the policy was purchased, or becomes insolvent.

The Side-A excess part provides excess Side-A D&O insurance that picks up coverage once a company’s traditional D&O tower or primary D&O layer is exhausted and which is available for the ultimate responsible C-level only.

These two parts combined provide more protection and certainty for the individuals who will be held liable in their capacity as Directors and officers in case of complex claims, non-indemnifiable losses and/or bankruptcy situations.

This policy provides Side-A Excess coverage and fills the gaps in the traditional policy.

As a result, a small additional Side ‘A’ Excess DIC programme can therefore be sometimes much more powerful for optimal Board protection than the largest traditional D&O programme.

To find out more contact

marielouise.denotter@geounderwriting.com

+31 10 800 5447