Privately-held companies structuring a D&O insurance program, should consider an Excess/DIC A Insurance policy with less exclusions, broader terms, and conditions. In the last 20 years, Michael A. Rossi, Esq., Insurance Law Group, Inc. has seen too often, how privately held companies are reactive when purchasing D&O and advises on the risks that should be considered to maximize protection.
Why Should a Private Company Consider Buying Excess/DIC Side A Insurance?
The primary D&O policy purchased by a privately held company might be an excellent primary D&O insurance policy for a private company. But it cannot match the coverage provided by a properly worded Excess/DIC Side A policy, which has only one exclusion rather than the 10 or so exclusions in a private company D&O policy, and broader terms, conditions, and other coverage features that are provided only in Excess/DIC Side A insurance.
But an Excess/DIC Side A policy responds only when the company does not indemnify the director or officer for the particular claim at issue. So why should a privately held company buy such a policy? The reasons to consider buying such a policy include, but are not limited to, the following:
Derivative Action Risk
A corporation is created by statute in a particular state. Certain states, including but not limited to Delaware, prohibit a corporation from indemnifying certain aspects of a derivative action – the portion of the settlement or judgment that is intended to require the directors/officers to pay monies to the company to compensate the company for the injury caused. A derivative action for corporate waste is a perfect example of such a claim. In such a claim, the only thing standing between that portion of the settlement/judgment and the personal assets of the direct/officer is insurance. If a company is incorporated in Delaware or another state that prohibits indemnification of certain aspects of a derivative action, the directors and officers of such company face this risk.
Falling Out of Favor Risk
In some claim scenarios, even if a company is permitted to indemnify a director or officer, they choose not to do so because that director or officer has fallen out of favor with the company. Perhaps the allegations in the complaint are just so repugnant to the board they cannot bring themselves to permit advancement of defense costs, indemnification, etc., even though the allegations are not yet proven true. Or perhaps the director or officer left the company but is being sued for something that happened years earlier, and the board views such director or officer unfavorably.
Unclear Law, or Disputed Law Risk
In some claim scenarios, it is not clear whether the law permits or obligates the company to indemnify the director or officer, including the advancement of defense costs. And in some claim scenarios, there is a dispute between the company and its insurer on whether or not the company is permitted or obligated to indemnify the director or officer. In such a scenario, the insurer pays the loss first dollar and then seeks reimbursement from the company based on whether or not the company is permitted or obligated to indemnify. In this way, the director or officer is not left to fund his or her own defense while these indemnification issues are addressed.
Public Relations Risk
In some claim scenarios, the allegations are of such a nature that the company believes it would be a very bad public relations move to advance defense costs for, or otherwise indemnify, the director or officer that is the subject of the claim. In such a claim scenario, it is better for the company to not provide indemnification, let the insurer provide coverage to the director or officer, and then seek reimbursement from the company if the company was permitted or obligated in the first instance to indemnify the director or officer. In this way, there is no press or other publicity stating that the company is directly protecting the director or officer.
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For each of the above scenarios, it is impossible to predict all the different ways a traditional primary D&O policy might not cover some or all of the loss (defense costs, settlement, and/or judgment) at issue. By buying Excess/DIC Side A insurance, which is much broader, the chances that the non-indemnifiable loss is paid by insurance is maximized. We believe that this point cannot reasonably be disputed. It is a question of whether or not the company wants to buy the most favorable type of insurance to cover these types of risks. If they do, they should buy Excess/DIC Side A insurance.
Businesses need to be proactive about a D&O insurance program.
For D&O insurance questions, contact Greg Econn, Co-President and Managing Director, Venbrook Insurance Services, LLC, at firstname.lastname@example.org or 877-467-4288.
For D&O Legal implications, contact Michael A Rossi, Esq, email@example.com or 310-717-8806