New developments for Side A D&O insurance policies
December 2013 | SPOTLIGHT | RISK MANAGEMENT
Financier Worldwide Magazine
D&O insurance is often the last line of defence for the personal assets of a director or officer. As such, directors and officers cannot leave to chance whether this important asset will protect them when they need it most.
Recently, there have been a lot of significant changes to the Side A forms being offered by insurers. Even a policy that was ‘state of the art’ a few years ago is likely now obsolete. To ensure that you have the best protection available, directors and officers need to know about some important coverage enhancements that are now available.
Broader insuring agreements
The best Side A policies today include several extensions of coverage beyond the ‘standard’ protection available from a traditional ABC policy. For example, the best policies now include broad coverage for investigations of directors and officers. Such additional protections include coverage for required meetings or interviews with the enforcement bodies such as the Securities and Exchange Commission and the Department of Justice and even include expenses related to the production of documents to those entities.
The best policies also include coverage for ‘personal liberty protection’. This enhancement covers expenses related to an insured seeking lawful release from arrest or confinement before the matter becomes a formal ‘claim’ as defined by the policy.
Other enhancements that are now available include blanket coverage for for-profit outside directors and expanded coverage for certain fines and penalties.
Having broad protection in the insuring agreement is important – however, just as important are the triggers that will allow the Side A protection to activate. The strongest policies today will activate if the underlying insurers and/or the company fail or refuse to advance defence costs or indemnify for any reason. It is vitally important that a Side A policy has these triggers.
Similarly, it is extremely important that a Side A policy will drop down to fill in the gap in coverage if one of the underlying insurers becomes insolvent or fails to pay covered loss. There are a number of policies on the market today that specifically state that they will not drop down due to the insolvency of an underlying insurer. Such policies should be avoided if that provision cannot be amended.
Side A policies generally have fewer exclusions than a traditional ABC policy. For example, Side A policies typically do not have exclusions for ERISA, pollution or failure to maintain insurance claims. Today, however, the strongest policies will also remove the bodily injury exclusion, the insured vs. insured exclusion and the prior notice exclusion. These are significant enhancements that may determine whether a claim against a director or officer is covered by the policy.
Avoiding gaps in coverage
One of the most significant problems with using an ‘older’ Side A policy is that it can create a gap in coverage if the Side A policy is more restrictive than the underlying ABC policy. Like Side A policies, ABC coverage has expanded dramatically in the last several years. The result is that an older Side A form may actually provide less coverage than the underlying ABC policy instead of more.
This is particularly important since the Side A form will likely use its own definitions and terms and conditions. This can lead to gaps in coverage related to the arbitration, notice and discovery provisions among others.
To ensure that there are no potential gaps in coverage (where the primary ABC policy would respond but the Side A only policy would not), directors and officers must be sure that the Side A policy has a provision that states that the Side A policy will follow the terms of the underlying ABC policy if the underlying ABC policy’s terms are broader. However, even this language will generally contain exceptions for several provisions in the Side A policy.
A more effective option is to have the insureds use the same insurer for the ABC policy as they do for the Side A only policy. Ideally, this would ensure that the terms and conditions are aligned in both policies.
Historically, some insureds were reluctant to place the ABC policy and the Side A policy with the same insurer due to concerns that the primary policy may be incentivised to push losses to the Side A policy in order to reduce the limit at stake in a particular claim. Arguably, since the Side A insurer would not have any incentive to subrogate a claim against itself on the ABC policy, there would be no one to challenge the denial of coverage and an unscrupulous insurer could avoid paying the ABC policy’s limit.
At least one insurer has addressed this concern head on by offering a liberalisation endorsement to insureds that use the insurer on both the primary ABC policy and the Side A policy. The endorsement liberalises the Side A coverage in the primary ABC policy to match the coverage in the Side A policy. This ensures that the insureds will receive the broader terms of the Side A policy throughout the entire tower. This eliminates the difference in conditions concern addressed above and effectively mitigates any incentive for the primary insurer to wrongfully deny coverage in the primary policy due to differences in conditions.
Excess Side A issues
Older Side A excess policies can also be very problematic. Until recently, many insurers simply took their traditional ABC excess policy and added an endorsement to say it followed the lead Side A policy instead of the primary ABC policy. However, this approach caused several significant problems with the policy wording and resulted in serious potential gaps in the coverage.
For example, one issue that has consistently been a problem with Side A excess policies is the drop down language. Many Side A excess policies say that they will not drop down due to the insolvency of an underlying layer. As an ABC excess policy, that is appropriate. However, as a Side A excess policy, it is not. In fact, one of the main reasons to purchase a Side A policy is to protect insureds if an underlying ABC insurer becomes insolvent.
Directors and officers must be vigilant about their Side A coverage. What was acceptable just a few years ago is likely significantly out of date today. To ensure that they have the best protection available, directors and officers need to review their policies every few years to make sure they are keeping up with the latest policy enhancements.
Thomas H. Bentz Jr. leads the D&O and Management Liability Insurance Team at Holland & Knight. He can be contacted on +1 (202) 828 1879 or by email: firstname.lastname@example.org.
© Financier Worldwide
Thomas H. Bentz Jr.
Holland & Knight