Reed Smith In-depth

Directors’ and officers’ liability (D&O) insurance insures corporate directors and officers against personal liability for claims made against them based on their service to the company, and also may insure the company against its own liability in a securities claim. Companies purchase D&O insurance to protect their directors and officers if the company cannot indemnify them. For instance, if the company becomes insolvent and is financially unable to indemnify; in shareholder derivative litigation, because companies are legally prohibited from indemnifying directors or officers for monetary judgments or settlements; or if the company determines that it cannot indemnify, such as with certain criminal or regulatory proceedings against the director or officer.

Traditional D&O insurance policies protect management and the company in three ways:

  • “Side A” coverage, which insures directors and officers for claims made against them when the company cannot or does not indemnify them
  • “Side B” or “corporate reimbursement” coverage, which insures the company for amounts it pays as advancement or indemnification for claims made against directors and officers
  • “Side C” or “entity securities” coverage, which insures the company for securities claims made against it as an entity

Many companies supplement traditional “full side” D&O insurance programs with excess Side A-only insurance to provide additional, dedicated insurance coverage for their executives.

D&O insurance is more than just insurance

D&O insurance is not just protection for the bottom line: companies view broad D&O coverage with sufficient limits and up-to-date terms and conditions as a critical benefit for attracting talented directors and officers. Indeed, Delaware, where more than two-thirds of all Fortune 500 companies are incorporated, made it the state’s public policy to encourage corporations to purchase D&O insurance on behalf of their directors and officers.1

Recently, however, companies have witnessed upheaval in the D&O insurance market, as premiums have become substantially higher, capacity in the insurance industry has been reduced (in particular for public companies), and insurers have sought to retract or narrow certain terms and conditions of their traditional D&O policies. Commentators cite the reasons for this “hard market” as increased litigation in the financial industry, increased securities litigation in prior years, increasing monetary judgments or settlements in securities cases, and the economic disruptions and rise of litigation due to the COVID-19 pandemic, among other reasons. Many companies have felt financial pressure to cut back on the amount of D&O insurance they buy. Reducing coverage increases the financial risks to companies and makes it harder to attract talent. As a result, many companies have sought alternatives to their traditional D&O insurance programs to maintain the protections that boards and management should expect.