Not All A-Side Policies Are Equal

There are different types of A-Side policies with dramaticallydifferent policy wording, so it's imperative that buyers understandwhat they are getting.

Carl Pursiano, senior vice president of management liability atBoston-based Liberty International Underwriters, which offersvarious A-Side protection, offered the following explanation of thedifferent types.

o Side-A coverage aspart of Side A/B/C D&O policy

A traditional D&O policy generally consists of threeinsuring agreements, known as agreements A, B and C, he said.

Side A offers coverage for individual directors and officers forlosses that the company cannot indemnify. They can include lossesfrom settlements/judgments in shareholder derivative lawsuits,allegations of federal security law violations, violating certainstandards of conduct in state indemnification statutes, or when thecorporation is financially unable to provide coverage for adirector or officer.

However, if a court applies an automatic stay to thecorporation's assets, it can freeze the traditional D&O policyand deny directors and officers immediate access to coverage, whichcan put their personal assets at risk, Mr. Pursiano said.

o Separate A-Side D&O policy (Without DICCoverage)

A separate A-Side policy without difference-in-conditionscoverage, purchased in addition to the traditional D&O SideA/B/C policy, strips away the coverage for Side B/corporatereimbursement and Side C/entity sections and provides dedicatedcoverage for individual directors and officers for losses thecorporations cannot indemnify.

Having a separate A-Side policy is especially important if thecorporation's traditional policy includes Side-C coverage.Securities claims made against a corporation fall under Side C, andthe coverage is often viewed by the courts as an asset of thebankrupt estate. Separate A-Side also offers greater assurance thatdirectors and officers may be covered if the corporation needs toaccess its policy's limits of liability.

o A-Side Difference-In-Conditions (DIC)Policy

While separate A-Side excess coverage may provide betterprotection for directors and officers than traditional Side A/B/Cpolicies, A-Side Difference-In-Conditions further expands thepolicy's D&O coverage by offering fewer exclusions and broadercoverage, Mr. Pursiano said.

A little-known coverage, up until recently, A-Side DIC is nowfilling the market need for extended D&O protection. Asknowledge of A-Side DIC becomes more prevalent among board members,the trend toward having this form of A-Side is poised to getbigger, he said.

A-Side DIC extended coverage could include:

1. Non-rescindable feature in the event of a financialrestatement. The DIC policy stays in force even if thecorporation restates its financial earnings, unlike a traditionalpolicy, where the coverage may be jeopardized, Mr. Pursianosaid.

2. Narrower bodily injury/property damageexclusion. Unlike the one found in traditional Side A, DICprovides some coverage for lawsuits stemming from bodilyinjury/property damage allegations, he said.

3. Broader definition of a claim and no prior litigationexclusion.

4. No exclusion for violations of Section 16(b) of theSecurities and Exchange Act of 1934, involving profitsfrom purchases and sales of company stock within a six-monthwindow.

5. No pollution exclusion. While still notcovering directors and officers for pollution violations, DICprovides coverage against class action/shareholder lawsuitsresulting from stock price dip resulting from pollution violations,Mr. Pursiano explained.

6. No presumptive indemnification wording. Fullcoverage is extended regardless of the language parameters of thecompany's bylaws/charter.

7. Limited insured vs. insured exclusion.According to Mr. Pursiano, DIC policies have much narrowerexclusions than those found in traditional D&O policies for thesituation when a director/officer sues or is sued by anotherdirector/officer, or when the director/officer sues itscorporation.

In addition to these possible coverage expansions, an A-Side DICpolicy can be used even before all the company's insurance fundsare exhausted, which is beneficial in the event of bankruptcy, Mr.Pursiano said.

Further, an A-Side DIC policy's "drop-down" feature allows theexcess policy to become the primary coverage for claims that thecorporation cannot cover or that are excluded from the traditionalpolicy, or in the event that underlying insurers have financialinsolvency.

For example, if directors and officers are named in a fiduciaryclaim, which is generally subject to the ERISA exclusion of astandard D&O policy, they may be left without coverage. But ifthe corporation is in bankruptcy and the corporation has an excessA-Side DIC policy which doesn't contain an ERISA exclusion, thispolicy would drop down and cover them, he said.

Michael Ha is a former Assistant Editor for NationalUnderwriter. He is now working as a freelancer in New YorkCity.

Caption if there is art, use as pullquote otherwise.

With non-rescindable forms, drop-down features, and theelimination of prior litigation, pollution and ERISA exclusions,DIC policies are the broadest A-side policies--and demand is poisedto get bigger.