Do independent directors need IDL coverage? A look at independent director liability insurance and the added protection it offers.

• Author: Weiss, Stephen J.
• Position: D & O INSURANCE UPDATE

DID YOU KNOW that there are liability policies solely for independent directors? This insurance product, offered by just a few insurers, is generically referred to as independent director liability (IDL) insurance and can be purchased by companies or individual directors themselves. IDL is a type of D & O policy but, unlike other D & O policies, IDL coverage is limited to independent directors.

Although IDL insurance offers some benefits to independent directors not afforded by other types of D & O policies, IDL has not sold well since it was introduced several years ago. That may change soon. A leading D & O insurer has recently introduced an improved version of its IDL policy and is marketing it aggressively with letters to all public-company directors.

Should you consider adding an IDL policy to supplement the D & O policy or policies that already cover you? This largely depends on cost considerations and the specifics of your existing D & O insurance, particularly the amount of the aggregate policy limit.

To help you determine whether IDL is right for you, a brief history of D & O insurance is in order. In the mid-1990s, most D & O insurance policies were rewritten to provide companies with direct protection for securities claims (so-called entity coverage) in addition to the traditional protection for directors and officers. While entity coverage eliminated the problems that arose from allocating loss between insured individuals and an uninsured entity, it had the adverse effect of diluting the coverage afforded insured persons.

Worse yet, under some of these new policies entity coverage increased the likelihood that the policy proceeds would be unavailable to the directors and officers if their company filed for bankruptcy. (Bankruptcy courts might determine that policy proceeds are the rightful property of the bankruptcy estate. In that event, the proceeds are subject to the bankruptcy court's jurisdiction and might not be available to pay directors' and officers' defense costs, settlements, or judgments.)

Many insurers responded to these two shortcomings by creating a Side A policy, another type of D & O insurance that covers only directors and officers and typically is in excess over traditional D & O insurance. This policy eliminates the bankruptcy concern as well as the dilution that are undesirable side effects of entity coverage.

However, entity coverage is not the only source of dilution, so Side A insurance does not...