The volume of bank failures and ensuing litigation arising from the financial crisis reminds us of the importance of understanding insurance policies that provide coverage for directors and officers. Specifically, a director or officer could be personally liable in shareholder lawsuits, state and federal actions and a wide range of other bank-related problems.
There are typically three types of directors and officers (D&O) liability insurance: Side A, B-side and C-side coverage. C-side coverage is for the company itself. B-side coverage provides insurance protection for directors and officers when the company indemnifies them, such as offering indemnification against shareholder lawsuits in the company’s by-laws. Side A D&O liability insurance covers directors and officers for loss and defense costs that are not indemnified by the company, perhaps because laws forbid indemnification or because the company is financially unable to provide indemnification. As a director or officer, your personal assets may become vulnerable in the event that the company fails or refuses to indemnify you. There are three main factors impacting the company’s willingness and ability to indemnify a director or officer for these costs:
- The scope of indemnification provisions provided in the company’s own by-laws
- The permissibility of indemnification of judgments and settlements pursuant to the law of the state in which the company is incorporated
- The financial ability of the company to provide indemnification
Beyond the company’s by-laws, indemnification is not guaranteed. Each state has its own statute regarding the indemnification of judgments and settlements in derivative suits brought by shareholders against directors and officers. These statutes may override a company’s by-laws. In addition, if the company is financially impaired, it may be unable to indemnify its directors and officers. In each case, the directors and officers may be exposed. Side A coverage is an added layer of insurance protection for unforeseen circumstances.
Still, there are a variety of other exposures banks can buy insurance to cover. One viable option is an excess Side A/DIC (difference in conditions) policy, in addition to the base D&O policy. A DIC policy may provide coverage when an underlying insurer fails, refuses to indemnify or is not liable for the loss after applying the terms and conditions of its policy. Such excess policies are offered by a wide array of insurance carriers, and generally contain fewer exclusions than the base policy. The excess Side A/DIC policy includes various features of coverage that would be of particular interest to an individual serving on a bank’s board. A few highlights are as follows:
- Payment of compensation clawback costs if the company must clawback a portion of an executive’s pay as required by the Dodd-Frank Act or the Sarbanes-Oxley Act.
- Situations in which a DIC (difference in condition) trigger event occur, which would be clearly defined in the policy form.
- Coverage for derivative actions brought by shareholders against directors and/or management, as state law sometimes prohibits the company from indemnifying defense costs or settlements/judgments arising from derivative actions.
The use of a properly written Side A policy often serves as the extra layer of insurance protection to the members of a board, and in most cases the final safeguard of your personal assets. When discussing your D&O policy with your insurance broker, be sure to pay particular attention to the areas where you may be exposed without insurance at all.
This article is provided for informational purposes only. Zurich is not providing legal advice and assumes no liability concerning the information set forth above.