Sophisticated directors and officers insurance programs are generally built in layers, with a full ABC underlying policy, topped with excess limits and/or a Side A DIC (difference in condition) cap. In contrast to the full 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, in addition to acting as excess side A coverage, any DIC policy should provide coverage for costs and losses not indemnified by the underlying carrier, due to:

• More restrictive terms contained in the underlying policy
• The underlying insurer’s own insolvency
• An automatic stay of bankruptcy or other legal restriction
• An inability to indemnify, as a result of licensing issues in that particular claim jurisdiction
• The insurers (wrongful) refusal to indemnify, or exceeding their timeframe to provide indemnificaiton
• The underlying insurer rescinding, voiding, or cancelling coverage.

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. The most notable claim triggers absent from poorer policy forms were; requests to toll the statute of limitations and requests for injunctive relief. The extent of coverage for investigations against insured persons can also differ considerably. Broader policy forms will often allow coverage to be triggered by requests for interviews or meetings and any/or arrests or detainments by enforcement authorities.  Where poorer policies may outright omit coverage for fines, penalties, punitive and exemplary damages, broader policy forms will provide affirmative coverage for any fines and penalties (subject to the most favorable jurisdiction) for any unintentional violations of law, including but not limited to:

• Those under certain sections of the Foreign Corrupt Practice Act and UK Bribery Act
• Those under the SOX Act (including but not limited to Section 308)
• Those under the Dodd Frank Wall Street Reform and Consumer Protection Act, and
• Civil fines and penalties assessed during financial insolvency
   

In determining the most favorable jurisdiction, broad Side A policies agree to consider the jurisdiction with a substantial relationship to the insureds, or to the claim giving rise to the fines and penalties. Some carriers will further allow for a written opinion from an independent counsel (which is not to be contested by the carrier) that such fines, penalties and punitive damages are insurable by law. Well-structured policy forms will also include a wide range of “defense costs” such as: fees incurred at the insurers’ request to investigate a claim, costs assessed against the insured, and expert and mediation fees.

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, policyholders should also be aware of additional enhancements currently available in the marketplace such as:

• Global liberalization endorsements which agree to provide broader policy terms in foreign jurisdictions.
• Reinstatement of policy limits, agreeing to reinstate the policy to its full limit (following any erosion), once the policy enters run off
• Long tail ERP/Run Off options allowing for lengthy claim reporting following a change in control event or insolvency.
• PR coverage for costs involved with hiring a PR firm to manage negative press following a high profile incident.