A typical public company D&O insurance structure generally includes a combination of full D&O insurance along with a Side A DIC (difference in condition) cap. In contrast to the underlying public D&O policy which provides coverage for the company’s balance sheet, Side A DIC D&O policies provide broader coverage solely for non-indemnifiable claims against insured persons. One of their main allures is the ability to fill coverage gaps of the underlying policies. But not all Side A DIC policies are created equal. Corporate officers (and their brokers) need to perform the same level of due diligence when reviewing and negotiating DIC policy placements.
At their most basic, any DIC policy should provide coverage for costs and losses not indemnified by the company, due to:
- Inability or refusal of the company to provide indemnification
- Inability of the insurer to provide indemnification for Side A claims (due to the insurers own insolvency)
- Side A losses declined by the underlying insurer (due to more restrictive coverage terms)
- In an excess capacity for losses exceeding the underlying carrier’s Side A limits.
The broadest Side A D&O policies often limit their exclusions almost exclusively to the conduct/fraud exclusion, however some carriers contain more restrictive terms, also precluding coverage for (among other claims) claims related to bodily injury, personal injury and property damage. These exclusions can be particularly problematic during derivative actions that may allege sexual misconduct, or cyber/privacy failures, both of which are on the rise. Corporate officers should also be on the lookout for any pollution exclusions. While rarer, pollution related exclusions can pose coverage challenges for any ESG related derivative litigation. Given their often very broad nature, and due to the fact that they can be fairly easily bypassed, these exclusions should be avoided at all costs on a DIC policy. This is especially true if the underlying policy maintains the same exclusionary language. Additionally, some DIC policies also contain insured vs insured (or entity vs insured) exclusions that are equally as prohibitive as the policies they are sitting on top of, which should be removed entirely or softened as much as possible.
When purchasing Side A DIC, policyholders would naturally expect coverage for a wider range of covered claims & damages, however some carriers provide little to no additional enhancements to their definitions. Most notably absent among poorer policy forms were; requests to toll the statute of limitations, requests for injunctive relief, and coverage for investigations against insured persons (triggered by receipt of a wells notice or subpoena). In terms of covered damages, instead of providing coverage for fines and penalties (per the most favorable jurisdiction), we noticed a number of carriers outright omitted coverage for resulting fines/penalties altogether, and failed to include coverage for expenses associated with SOX 304 and Dodd Frank 954 clawback provisions. While all of these “claims” and “losses” should already be included by the underlying D&O insurer, policy forms can of course vary, emphasizing the importance of ensuring the broadest possible terms on the DIC layer, allowing coverage to effectively drop down to fill the underlying coverage gaps.
One of the main reasons for implementing robust Side A coverage is to protect against claims asserted during insolvency. In addition to increasing the overall available Side A limit, DIC policies also don’t run the same risk of being deemed as proceeds of the bankruptcy estate (leaving the directors and officers without coverage). So it goes without saying that such policies should maintain the broadest language when it comes to bankruptcy protections, unfortunately however some policies fall a bit short. When performing a coverage assessment, it’s important to ensure the policy recognizes the “debtor in possession” as a named insured, and doesn’t contain any bankruptcy triggered change in control provisions which would negate coverage for wrongful asserted after the appointment of any bankruptcy trustee. Some of the broader policy forms today further provide an additional enhancement, extending lengthy ERP’s (extended reporting provisions) in the event of insolvency – an amendment all policyholders should attempt to negotiate during coverage placement in order to preserve coverage for future claims alleging wrongful acts committed prior to the insolvency.
Lastly, some DIC carriers are now amending their policy forms to include an even wider range of valuable add-ons such as coverage for costs related to the arrests or detainment of corporate officers, and PR coverage for costs involved with hiring a PR firm to manage negative press. Reinstatement of policy limits is another valuable enhancement – with some insurers agreeing to reinstate the policy to its full limit (following any erosion), once the policy enters run off. Policyholders and their brokers should be aware of these enhancements and request them when placing or renewing any coverage.
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