Directors and officers liability (D&O) insurance

Directors and officers liability (“D&O”) insurance generally covers losses arising from claims against directors and officers of the employer for “wrongful acts,” either accidental or intentional, that were committed within their official capacity as directors or officers. Some jurisdictions do not allow for indemnification for intentional acts on public policy grounds. In evaluating whether or not D&O insurance is available for employment-related claims, focus on the terms “wrongful acts” and “official capacity.”

1. “Side A” coverage. Because D&O policies directly cover directors and officers, the coverage operates even when the company does not have a legal duty to indemnify the directors and officers. Specifically, D&O coverage provides indemnification for both defense expenses and payments of settlements or judgments that arise from employment practices claims brought against the directors and officers. These policies usually do not require a retention (that is, a deductible) and thus protect the directors and officers from having to use their own financial resources to pay the costs of any claims for which they are not indemnified by the company.

2. “Side B” coverage. Previously, D&O policies did not cover the corporation (they only covered the directors and officers of the corporation), so “Side B” coverage arose to directly reimburse the corporations themselves. D&O policies usually do not cover a corporation’s respondeat superior liability (where the employer is held liable for the wrongful acts of the employee, if those acts occur within the course or scope of the employment), even where the board of directors directly approved those acts. However, D&O policies eventually started to offer “company reimbursement,” which provides coverage to the company when the company is required by law to indemnify directors or officers or has already indemnified them, and if the law allows for indemnification. “Side B” coverage has become the typical primary D&O coverage because companies usually have to indemnify directors and officers.

3. “Side C” coverage. In the late 1990s, insurers began offering “Side C” coverage, also called “entity coverage.” “Side C” coverage provides coverage for claims against the company that are usually excluded or not covered by commercial general liability (CGL) policies. It typically provides coverage for securities-related suits against publicly traded companies. Therefore, if a securities-related lawsuit names both the company and the individual directors/officers as separate defendants, “Side C” coverage will cover any defense costs and possibly judgments or settlements that constitute the company’s separate share of liability. On the other hand, if a policy does not include “Side C” coverage, any amount spent on the company’s defense or the company’s ultimate liability in that claim will not be covered by the D&O policy.

About the same time as the insurance companies’ expansion of coverage, insurers began offering coverage for employment practices torts as an endorsement to the basic policy form. These coverages became quite lengthy. Some offered insuring agreements on a different basis than the basic D&O form—that is, the coverage was based on a duty to defend rather than on a reimbursement basis. At this point, insurers took the next logical step and began offering coverage for employment practices claims as a standalone from the basic policy form, that is, as a separate policy form.