Companies that have a board of directors or high placed officers need to have directors and officers (D&O) insurance to help in the event of claims against these individuals. Not all directors and officers insurance relating to negligence are the same, and tighter corporate budgets are leading to too many managers shopping for coverage of any type, often determining a purchase based on price, regardless of the quality of protection it offers.
That may leave you exposed to undue risk, and might want you to reconsider just what type of policy is in the best interests of those who faithfully serve the company’s needs and interests. Summarized below are some tips to ensure that a D&O policy provides true protection against fiduciary liability.
Realize that all coverage is limited, and any pending or threatened claims reduce the effective coverage available for protection. Solid D&O insurance policies contain “Side A” coverage. Essentially, Side A coverage provides for a special sub-amount of coverage that is available only to individual insureds, so that company reimbursement claims cannot eat up all of the coverage that would otherwise be available to the individuals.
Furthermore, even if the company were to go into bankruptcy, most bankruptcy judges will permit continuing and immediate access to this coverage for the defense costs or liabilities incurred directly by a director, or other individually insured officer, even if the primary policy were to be considered “property of the bankruptcy estate.”
Another important concept to note is that all D&O policies exclude coverage for claims of one insured versus another, such as lawsuits between officers. Though this is rarely the case, it is prudent to understand that such exclusions may exist, furthering the need to speak to a reputable agent when deciding which directors and officers insurance to purchase. The better policies contain an exception to this exclusion to make clear that lawsuits by a company’s creditor representative do not fall within that exclusion.