D&O policies generally provide three sections of coverage, commonly known as coverages A, B and C. “Side-A” coverage provides protection for individual directors and officers in any of the following circumstances: 1) where the parent organization is not legally required to indemnify the director or officer for a claim; 2) the directors or officers are required to pay a settlement or judgment in connection with a shareholder derivative action; or 3) the parent corporation cannot financially indemnify the director or officer due to a financial situation such as bankruptcy. “Side-B” coverage, “Corporate Reimbursement,” usually provides that the policy will cover the parent company’s obligation to indemnify its directors and officers in conjunction with corporate bylaws or state statutes. Because the parent corporation is not usually a covered party under the standard D&O liability policy, many insurers offer “Side-C” coverage, “Entity Coverage,” that might expand the D&O policy to provide coverage to the parent company in situations involving a securities claim.
D&O claims present significant coverage issues. It can be difficult to determine whether the insured’s claim properly triggers coverage under the D&O policy. Formal investigative orders, civil, regulatory, or administrative proceedings resulting from charges being filed against the insured are generally considered to be “claims,” but an SEC inquiry letter, for example, might not be considered a “claim.” There could be multiple actions underway simultaneously, such as a Department of Justice investigation, an SEC inquiry, a derivative action and a securities class action. Insurers are then confronted with determining what aspects of the “claim” are covered under the policy. These complexities raise significant questions for insurers as well as reinsurers, given the enormous costs of providing a defense.
D&O excess policies often have a clause that provides that any underlying liability policies must be exhausted before the excess layers respond. Generally, each carrier within the complete coverage scheme will handle its claims separately and may mitigate the impact by negotiating a reduction in its liability. In such a case, the excess carrier might argue that its obligation has not been triggered because the underlying layer has not been fully exhausted. An insured, for its part, might seek to avoid what can escalate into an expensive set of disputes by negotiating a global settlement agreement with all the carriers.