The popularity of Side A D&O policies increased dramaticallyover the last decade. Fueled in large part by the spectaculardemise of numerous large companies during the Enron-era, directorsand officers began to better appreciate the importance of highquality insurance coverage for non-indemnified losses.

One of the most attractive selling features of Side A D&Opolicies has been the extraordinarily broad coverage terms in thosepolicies when compared with standard “ABC” D&O policies, whichalso covered the company's D&O indemnification and securitiesclaims exposures. However, in today's highly competitive D&Oinsurance market, many of those broad Side A coverage features arenow being added to the underlying ABC policies. Examples includecovering pre-claim inquiry costs and various fines or penalties,amending the Insured v. Insured exclusion to an Entity v. Insuredexclusion, and deleting the pollution exclusion and presumptiveindemnification provision.

This has caused some insureds to question whether separate SideA D&O policies still have value. In fact, Side A policiescontinue to provide important and valuable insurance protectionsfor directors and officers which cannot be duplicated through ABCpolicies, including broader coverage terms, limits solely dedicatedto non-indemnifiable losses and greater certainty of coverage inthe event of a bankruptcy.

BROADER COVERAGE TERMS

Even with the recent expansion of coverage under ABC policies,directors and officers can still obtain broader coverage under manySide A D&O policy forms available in the market. Examples ofsome of these extraordinary Side A coverage features, which aregenerally not available in ABC policies, include:

• Broad excess “difference-in-conditions” or “DIC” drop-downfeature.

In other words, the Side A policy will drop down andrespond if an underlying insurer fails or refuses to pay loss forany reason, including the underlying insurer not covering a loss,wrongfully refusing to pay a loss or becoming insolvent.

• Narrow “conduct” exclusions.

For example, under many Side A policies, the conduct exclusionsare not applicable to defense costs even when the exclusions aretriggered, unlike ABC policies. In addition, some Side A policiesstate that the conduct exclusions do not apply to claims againstindependent directors or if the majority of disinterested directorswaives the exclusion with respect to a claim. ABC policiestypically do not contain these carve-outs to the conductexclusions.

• Narrow or no “bodily injury/property damage” exclusion.

Some Side A policies completely delete this exclusion. ThoseSide A policies that retain the exclusion frequently state theexclusion does not apply to pollution claims or if the majority ofdisinterested directors waives the exclusion. ABC policiestypically do not contain these enhancements.

• Narrow or no “Entity v. Insured”exclusion.

Some Side A policies completely delete this exclusion, unlikeABC policies. Even if the exclusion is retained, many Side Apolicies contain several broad carve-outs not found in ABCpolicies. For example, the Entity v. Insured exclusion applies onlyif at least two current senior executive officers of the companyapprove or assist in prosecuting the claim by or on behalf of thecompany, and the exclusion does not apply either if the majority ofdisinterested directors waives the exclusion or if independentlegal counsel opines that the fiduciary duties of the company'sdirectors and officers require them to bring the claim.

• No ERISA exclusion.

Unlike ABC policies, Side A policies do not contain an expressERISA exclusion.

These coverage enhancements can be critically important fordirectors and officers if they incur a loss described above and ifthat loss is neither indemnified by their company nor paid by theABC insurers for any reason. In that situation, a broad Side Apolicy is the only protection available. Absent a high quality SideA insurance program, that non-indemnified loss must necessarily bepaid out of the personal assets of the directors and officers.

NO LIMIT OF LIABILITY DILUTION

The limit of liability under a Side A policy is available tofund only non-indemnified loss incurred by directors and officers.In contrast, the limit of liability under a traditional ABC policyis also available to fund D&O losses indemnified by the companyand corporate losses due to securities claim.

In other words, directors and officers can lose their personalasset protection under a traditional ABC policy if the companyusurps the policy proceeds for its own covered losses. That riskdoes not exist under a Side A policy, which preserves its limit ofliability for only director and officer losses that are not paid byanother source (i.e., for only losses which must otherwise be paidby the director and officer personally).

This risk of the company consuming the ABC policy limits to thedetriment of directors and officers can be mitigated by a “priorityof payment” provision in the ABC policy. The provision generallysays non-indemnified director and officer losses are paid beforecompany losses.

However, such a provision does not eliminate the limit ofliability dilution concerns. For example, if a Side B and Side Ccompany loss (e.g., a securities class action settlement) isincurred prior to a non-indemnified Side A loss (e.g., a derivativelawsuit settlement) is incurred, the company loss may exhaust theABC limit notwithstanding the priority of payment provision.

In that case, the individual defendants in the derivativelawsuit would have no insurance or indemnification for thederivative lawsuit settlement absent a Side A policy.

The value of the Side A policy's dedicatedlimit of liability can be further enhanced by the purchase ofseparate Side A policies, called “independent directors liability”or “IDL” policies, which cover only independent directors or onlyofficers. Under these types of policies, the insured persons'insurance protection is insulated from losses incurred not only bythe company but also by other types of executives.

BANKRUPTCY ISSUES

Under the federal Bankruptcy Code, neither the bankrupt companynor any third party can take any action which reduces the value ofassets in the bankruptcy estate unless the bankruptcy courtapproves that action.

Courts generally find that ABC policies maintained by a bankruptcompany are assets of that company's bankruptcy estate becausethose policies directly insure the company, among others. As aresult, the proceeds of that ABC policy are automatically “frozen”when the company files bankruptcy, and those proceeds cannot beaccessed by any insured (including any director or officer) unlessand until the bankruptcy court approves the payment by theinsurer.

In contrast, a Side A policy is generally not an asset of thecompany's bankruptcy estate because that policy does not insure thecompany or protect assets of the company. As a result, theBankruptcy Code generally does not prevent payments under the SideA policy even though payments under the ABC policy areprohibited.

Having Side A coverage immediately available for D&Olitigation while a company is in bankruptcy is criticallyimportant. Often, such litigation is very expensive to defend andcannot be stayed by reason of the company's bankruptcy. Without aSide A policy, which would fund those defense costs while theunderlying ABC policy is “frozen,” the individual defendants mightbe forced to pay personally those large defense costs or tojeopardize the quality of their defense efforts.

In many cases, the bankruptcy court will eventually lift theautomatic stay and allow payments of D&O losses under the ABCpolicy, but that result is far from certain and in any eventusually takes many months to obtain. In the interim, a Side Apolicy may be the only financial protection available for thedefendant director and officer.

In summary, Side A policies continue to provide invaluableprotection to directors and officers despite the recent expansionof coverage terms in ABC policy forms. A company unnecessarilyexposes the personal assets of its directors and officers if itfails to maintain a high-quality Side A D&O insurance programfrom one or more reputable, highly rated and experienced Side Ainsurers.

*****

The opinions and comments expressed in this article arestrictly the views of the writer and do not necessarily reflect theviews and opinions of Everest Re Group, Ltd. or any of itsaffiliates or subsidiaries (“Everest”). Nor should any of thestatements herein be construed as any affirmative position oradmission on the part of Everest with respect to any terms,conditions or language contained in any policy of insurance issuedby Everest.