Over the past few years, a majority of publicly traded companies have added A-side DIC D&O insurance to their insurance programs. The “Difference In Conditions” (“DIC”) aspect of these A-side excess policies typically provides broad coverage to individual directors and officers, specifying that the policy drops down to respond as primary coverage if the corporation and the underlying insurers fail or refuse to indemnify the D&O (whether rightfully or wrongly) or cannot provide such indemnity to the D&O (whether due to legal prohibition, financial impairment or otherwise). While it is fair to say that A-side DIC coverage is largely still a doomsday coverage for D&Os, the reality is that these policies essentially constitute the “last line of defense” for an individual D&O’s personal assets, and many consider such coverage to be the second most important layer of D&O insurance (after the primary policy on the traditional tower).
Indeed, A-side DIC coverage has increasingly been called upon to respond to claims, including for indemnification of judgment/settlement costs incurred in connection with derivative litigation (options back-dating cases, in particular); coverage after the corporation’s insolvency impairs the traditional D&O policies (bankruptcies are at a record high); and coverage of costs incurred in responding to interviews of former D&Os who have been denied indemnity by the “new” board (interviews typically do not constitute a “Claim” under traditional D&O policies).
A-side DIC policies could also drop down to provide indemnification to D&Os for gaps created by “below-limits” settlements entered into between the insureds and the underlying insurers, at least where the corporation has also failed or refused to provide indemnity for such gap (e.g., in the context of a derivative litigation settlement).
A-side DIC policies may also provide drop-down protection where underlying traditional insurers seek rescission of their policies (e.g., where a traditional insurer seeks rescission based on restated corporate financials), or where the underlying traditional insurance provides coverage on terms that are narrower than the A-side DIC policy. A-side DIC policies are typically non-cancellable and non-rescindable.
While the policy forms and coverages of many A-side DIC policies vary extensively, there are, nonetheless, certain common considerations that a prospective purchaser of such policies should examine before making a decision to bind coverage. Such concerns include: using a good insurance broker who is familiar with these specialized products; purchasing the best coverage you can afford; purchasing insurance from a financially stable insurer; purchasing a policy that reflects fair pricing; considering the claims handling experience of the insurer; considering your relationship with the insurer; considering the establishment of a D&O insurance committee; purchasing adequate limits; coordinating the A-side DIC tower with your other coverage; and considering the positives and negatives the inclusing of insurers providing overlapping coverage.
The attached article discusses each of these concerns in turn, and seeks to explain the fundamentals of A-side DIC D&O coverage and how it may differ from traditional D&O coverage.
The authors of the commentary note that ultimately, the person(s) in charge of making the insurance purchasing decisions should be proactive and consider the structure that is best for the individual insureds at that time, balancing the insureds’ various competing interests (e.g., coverage v. cost v. stability v. claims experience). The authors recommend that the insurance program structure should be reconsidered every year, as the D&O insurance market is ever-evolving. Having D&O insurance program reviewed before there is a claim can help to avoid future problems and ensure that there is time to correct any deficiencies. Good insurance brokers and coverage counsel are critical to the placement of a cohesive D&O insurance program which maximizes the benefits of A-side D&O insurance while avoiding common coverage pratfalls associated with such policies.
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