Derivative Lawsuits And Side-A Explained

Shareholder plaintiffs bringing derivative actions typically sue the directors and officers "in the name and for the benefit of" the company in which they hold shares, alleging harm done to the company through breaches of various duties.

D&O insurance experts explain that because plaintiffs in derivative actions sue directors and officers "on behalf of the company," it is illegal in many states for the company to then indemnify directors and officers for derivative suit losses.

In an article published in NU in 2004, Dan Bailey, an attorney and coverage expert for the Columbus, Ohio-based law firm Bailey Cavilieri, explained the prohibition in the following way. He said that although the shareholder is prosecuting a derivative suit against directors and officers, "effectively, the company is asserting the claim." Since that means that any settlement or judgment gets paid by the directors and officers back into the company rather than to the shareholder plaintiff, if the company could indemnify for such payments, "the money would go in a circle," he said.

But statutes do allow companies to purchase insurance to protect directors and officers in these instances. Derivative-suit losses typically implicate the Side-A coverage part of D&O insurance policies or separate Side-A-only policies—both of which cover individual directors and officers for non-indemnifiable losses.

Besides being non-indemnifiable as a matter of law, as in the case of derivative lawsuits, D&O losses can also be non-indemnifiable when a company is insolvent.

For more articles about Side-A coverage, go to www.propertycasualty360.com/tag/side-a