D&O Sides A, B and C explained

Side A pays directors and officers directly when the company cannot or does not indemnify them. Side B reimburses the company when it does indemnify them. Side C covers the company itself as a defendant. In most programs the three sides sit under one limit, but Side A usually has no retention and can be bought in extra, separate layers that protect personal assets if the shared limit runs out.

The three sides at a glance

IRMI's glossary describes Side A as direct coverage of directors and officers for acts the corporation is not legally required to indemnify. Side B is the corporate reimbursement section and Side C the entity securities section, in IRMI's wording. How the sides sit within the whole policy is in Directors and officers (D&O) insurance explained.

Side A: protection for the individuals

Side A is why a person agrees to join a board. It applies in situations where the company's money is not available:

• Legal prohibition. In a derivative suit, a company generally cannot indemnify judgments or settlements paid to itself. Delaware's 8 Del. C. § 145 is the standard example: indemnity in actions by or on behalf of the corporation is limited to expenses, and is barred where the person is adjudged liable to the corporation unless a court decides otherwise. Other states vary; see Delaware and ask corporate counsel about your own state.
• Insolvency. A bankrupt company cannot reimburse anyone. Creditors, trustees and committees often sue directors precisely when the company is failing.
• Refusal. A company can decline to indemnify, or may not have promised to in its bylaws.

Because the individuals have nothing to fall back on, Side A normally carries no retention and, on better forms, cannot be rescinded for one person's misstatement on the application (the "non-rescindable" or severable feature). Typical forms also apply a priority of payments clause: the insurer pays Side A losses first, even if there are Side B or C claims pending, so that executives are protected before the company. Ask whether yours has one, because the order matters in a bankruptcy where several parties want the same proceeds.

Side B: reimbursing the company

Most of the time, the company pays for its directors' and officers' lawyers because its bylaws or an indemnification agreement tell it to. Side B reimburses the company for that spending, above the retention. When the company is solvent, a claim against its managers usually starts as a Side B claim, because the company advances defense costs under its bylaws or an indemnification agreement and then looks to the insurer.

Side C: the entity itself

IRMI notes that standard corporate D&O forms historically reimbursed the company only for indemnifying its people, and that entity coverage, once limited to nonprofit and healthcare forms, is now offered by many corporate forms for additional premium. How broad Side C is depends on the product:

• Public companies. Entity coverage is typically limited to securities claims, such as shareholder class actions. See Securities class actions and the D&O market.
• Private companies and nonprofits. Entity coverage is commonly broader, covering any wrongful-act claim against the organization (with exclusions for contract, employment and professional services). That is why the private forms are often written as a single "ABC" form. See D&O insurance for private companies and startups and D&O insurance for nonprofit boards.

When a lawsuit names both the company and its directors, defense costs may need to be split between covered and uncovered claims or defendants. The allocation clause decides how; read whether it uses "best efforts" or a relative exposure formula, because that language can leave the company paying more than it expected.

How the program is built: primary, excess and Side A DIC

A single policy limit is shared by all three sides. Buyers with more at stake layer additional limits above the primary, called a tower:

1. Primary policy (A, B and C): the first layer, with the retention.
2. Excess ABC layers that follow form the primary and attach above it.
3. Side A-only excess layers, which cover only the individuals.
4. Side A difference-in-conditions (DIC): a Side A-only policy. IRMI describes Side A-only coverage as written on an excess or umbrella basis over a primary D&O policy, adding limits and, in the umbrella form, broader coverage than the underlying policy. A difference in conditions layer typically pays where the underlying policies do not, for example when an underlying insurer refuses payment, becomes insolvent or rescinds, and it can drop down to respond.

The purpose of the Side A layers is to ensure the individuals' protection is not consumed by the company's own claims. Because shared limits get eroded by Side B and C payments, a large entity claim can leave nothing for individual defendants.

A hypothetical walk-through

Say a privately held distribution company has a $3 million primary ABC policy with a $50,000 retention on Sides B and C, and a separate $2 million Side A DIC policy. The company becomes insolvent. A creditors' committee sues four directors for breach of fiduciary duty.

• Defense costs: $900,000. The company can't pay, so Side A responds with no retention. The primary limit is eroded to $2.1 million.
• Settlement: $2.6 million to resolve the claims. The primary pays its remaining $2.1 million. The Side A DIC policy pays the remaining $500,000, and its limit drops from $2 million to $1.5 million.
• Result: directors pay nothing personally. The DIC layer also remains available for related claims in that policy period.

Compare the same facts without the DIC policy: $500,000 of the settlement is uncovered, and the directors would have to fund it themselves or the claim would not settle. The figures are an illustration, not market-typical.

Questions to ask when buying

1. Is Side A included and is it non-rescindable?
2. Is there a priority of payments clause?
3. Does the shared limit fit the likely claims? If entity claims are a real possibility, a Side A-only layer is how the individuals get a limit that the company's own claims cannot erode.
4. What does the entity cover? Securities claims only, or all wrongful acts?
5. How are defense costs allocated between the company and its people?
6. What is the retention and does it differ by side?
7. What does the insured versus insured exclusion carve back? It decides whether trustees and derivative plaintiffs can recover; see The insured vs insured exclusion in D&O policies.

For small companies that buy D&O inside a Management liability packages: D&O, EPLI, fiduciary and crime, check whether the shared package limit leaves enough for the board.

Key takeaways

• Side A protects individuals directly and usually has no retention; Side B reimburses the company; Side C covers the entity.
• Sides A, B and C normally share one limit, so entity claims can erode what is left for the directors.
• Side A-only and Side A DIC layers give individuals their own limit, which matters most for insolvency and derivative claims.
• Entity coverage differs: securities claims only for public companies, often broader for private and nonprofit forms.
• Ask about priority of payments, non-rescindability, allocation and the retention before you sign.