Why you should know about Side A insurance: consider these specialized policies when structuring your D&O insurance program.

• Author: Weiss, Stephen J.
• Position: D&O Insurance Update

IF YOU HAVEN'T HEARD of Side A insurance policies, they probably aren't part of your company's directors' and officers' (D&O) insurance program. Perhaps they should be, because Side A policies often insure losses not indemnified by your company that your traditional D&O policies don't cover. Side A policies also provide liability limits exclusively for directors and officers.

Interest in Side A insurance is growing as a result of several factors, including cutbacks in traditional D&O policy coverage that leave you unprotected against many risks and more suits by insurers seeking to rescind D&O policies for application fraud. Responding to this increased interest, several insurers have introduced Side A policies. Although there are no standard policy forms for Side A policies, they fall into two general categories.

Side A Excess D&O Insurance Policy. The name of this product tells you the basics about its coverage. "Side A" reveals that the policy insures directors and officers only. It does not insure the company's obligation to indemnify its directors and officers (called Side B coverage), and it does not insure the company's liability for securities violations (called Side C or entity coverage). "Excess" reveals that the policy is triggered only after the underlying layers of insurance have been totally exhausted by the payment of loss.

This policy employs the "follow form" format, which means that it expressly adopts as its own the terms of the primary policy except, of course, for those primary policy terms that grant Side B and Side C coverage to the company.

One reason to consider this policy is concern that a large judgment could exhaust the entire dollar amount of your D&O insurance program. If that happened, you would be uninsured against losses arising from a subsequent suit filed against the directors and officers during the same policy year.

A second reason to consider this policy is the concern that your company might enter bankruptcy. In that event, a traditional D&O policy, because it also insures the company, may be treated by the bankruptcy court as an asset of the bankrupt company and thus first available to creditors, not you. By contrast, a Side A policy, because it does not insure the company, will not be treated as an asset of the bankrupt company. It will remain beyond the reach of the bankruptcy court and thus be available to pay your defense costs and other losses.

Before buying a basic Side A policy, please...