Is your D&O coverage as good as you think? That’s the million-dollar D&O question, and you can learn the answer the easy way… or the hard way.
Becoming a Specialist in D&O the Hard Way
No one is born an insurance specialist. I accidentally learned a lot about D&O coverage several years ago, when I worked in capital markets. One of my VC-backed deals did not go how I wanted, and as is often the case in such scenarios, liabilities arose. I thought I had enough D&O coverage, but I was wrong – and that mistake cost me a considerable amount of my own money.
I learned about the importance of robust, well-structured D&O coverage the hard way. Now, as a D&O insurance specialist, I help microcap leaders avoid similar D&O mistakes.
Three Coverages, One Limit
As you may already know, D&O insurance provides three “sides” of coverage.
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Side A covers the officers and directors when there is no indemnity from the company.
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Side B covers the company through reimbursement when the company indemnifies the directors and officers.
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Side C covers the company itself when it is named in a lawsuit.
Company leaders are often focused on securing adequate Side A coverage, but many executives don’t realize that in a primary D&O policy, sides A, B, and C all share the same limit.
Let’s say you have a shareholder liability claim. Your primary D&O policy has a $5 million limit, and you have $10 million in losses. Your primary policy limits are exhausted, so there’s nothing left to defend executives. As a result, executives are left paying for their own defense costs.
How to Cover Your Assets
There’s an easy way to avoid situations in which directors and officers face litigation with no coverage: Secure an excess Side A layer. The excess Side A layer sits on top of the underlying D&O policy, and it does not share a limit with this underlying policy. If the primary D&O policy limit is exhausted, the excess Side A coverage kicks in to provide coverage, including defense costs, with a new limit.
Once you understand how D&O coverage works, securing excess Side A coverage is an easy decision. No director or officer wants to be stuck in a position where they have to pay for their own defense. Even if the claim is unfounded and the defendant wins, court costs can be incredibly expensive. Paying for these legal costs out of pocket is a huge financial hit.
Unfortunately, too many company leaders don’t understand what’s on the line. They think the primary policy limit seems reasonable. They don’t realize how the primary limit can be exhausted before they access coverage.
An Easier Way to Answer Your D&O Questions
No one ever said D&O insurance is simple. It’s easy to think you have adequate coverage, only to find out you don’t when you’re facing a lawsuit.
Don’t be like me. I learned the hard way. That was a long time ago, but I still see many business leaders making the same old mistakes.
Small companies are particularly vulnerable to coverage issues because policy language is often written with larger organizations in mind. Ask yourself:
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Do you have individual executive tail coverage that covers you, or are you relying on standard executive tail coverage?
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What is the definition of the insured? Some policies exclude external advisors, which can be a problem for smaller companies that often depend on external advisors.
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Is your policy tailored for your company? Small companies don’t always need as much coverage as large companies, but coverage must be properly structured to match your risk profile.
Find out if your coverage is adequate before you’re faced with a lawsuit. Contact us for a complimentary review of your D&O coverage.
