Authors: Walker Newell Natalie Douglass, Esq.
Public company Directors and Officers (D&O) insurance programs have inherent structural tensions. When coverage is expanded in one area, it can bump up against coverage in another. When the policy is expanded to cover a new insured, another insured may get less protection.
These trade-offs can be significant. The question of which coverage buttons to push — and which to refrain from pushing — is heavily individualized, and this analysis should be sensitive to conditions on the ground at each company. Companies can and should lean heavily on an expert D&O insurance broker to help them navigate these competing considerations.
We'll walk you through some questions that come up frequently for our clients — but first, a quick refresher on the basic structure and purpose of the public company D&O program.
The central purposes of public company D&O
A public company D&O insurance program does two central things:
- Protect directors and officers from claims brought against them in connection with their work for the company
- Protect the company from securities claims
Most public companies buy two separate policy towers (Side ABC and Side A Difference in Conditions [DIC]) that combine to make up the D&O program.
When including endorsements and sub-limited coverage, ABC policies can address a wide range of risks. Most fundamentally, though, the ABC policy:
- Protects individual directors and officers for non-indemnified covered claims (Side A)
- Reimburses the company for its indemnification obligations to directors and officers for indemnified covered claims (Side B)
- Reimburses the company directly for losses (legal fees, settlements) from securities claims (Side C)
The ABC policy tower has a single shared limit across these three coverage sections. When this limit is eroded by one insured, it leaves less insurance available for the other insureds. For example, when a company is hit with a securities claim during a particular policy period, the covered losses stemming from that claim will shrink the pile of money otherwise available to directors and officers under the same policy.
The Side A DIC policy, on the other hand, belongs exclusively to directors and officers; the corporate entity doesn't get to eat at this table. The structural tension comes from how the policy defines the universe of corporate leaders the policy covers.
With this in mind, let's look at some examples.
Which corporate leaders should be covered by D&O insurance?
The question of who qualifies as an "executive" (a common defined term meant to encompass insured individuals, with implications for Sides A and B) can be consequential. If the circle of insured individuals is drawn too narrowly, important leaders may feel they have been left outside the tent. If the circle of insured individuals is drawn broadly, the shared D&O limits available to insured individuals could be eroded much more quickly in a corporate crisis (when numerous executives often all retain separate counsel).
This is an evergreen issue with many variations. Here are some common questions.
Does the D&O policy cover the chief information security officer, chief information officer and/or the functional equivalent of these positions at the company? If not, should it cover them?
This question had particular salience in the wake of high-profile enforcement actions the Securities and Exchange Commission brought from about 2020-2023. It has receded somewhat from view since, as the government appears to be taking a different enforcement posture. However, it's still top of mind for CISOs, and companies should be prepared to address it.
One helpful reminder in this context — for companies and CISOs — is that all employees are typically covered for securities claims (which would likely include SEC lawsuits) even if they aren't named in the policy.
What D&O protections should be provided to directors or officers of foreign subsidiaries?
D&O policies typically sweep broadly to include subsidiaries worldwide, but this isn't the end of the story.
If the company has an indemnification obligation to an affiliated individual and that individual incurs covered indemnifiable losses, D&O policies will generally follow the indemnification under Side B.
Interesting questions arise in the context of non-indemnifiable Side A claims, particularly for directors of foreign subsidiaries where there may be criminal regulatory exposures. In this context, companies may consider purchasing dedicated locally admitted coverage for these local leaders.
What D&O coverage is available for leaders serving on outside boards at the company's request?
Outside Directorship Liability (ODL) coverage can be tailored to cover leaders for these outside activities. The more expansive this coverage, however, the greater its potential to erode shared limits.
Key questions companies should ask themselves include:
- Should this coverage apply only to directors and officers serving on outside boards, or to lower-level executives or employees serving on boards?
- Should the coverage apply to boards of for-profit entities, or only non-profits?
- Should the coverage apply only when the company has specifically directed a leader to serve on an outside board, or is service with the company's "knowledge and consent" enough to trigger coverage?
Broader corporate coverage can mean less protection for individual directors and officers
When ABC coverage is expanded for the benefit of the corporate entity, it dilutes the coverage available to individual insureds. This is a structural feature of D&O policies, and it's not necessarily a bad thing. A well-structured ABC policy should provide broad coverage for both the corporate entity and individuals, supported by limits aligned with the company's risk management philosophy.
As public company D&O coverage has broadened in recent years, however, companies need to understand these structural tensions and make decisions that align with their risk management philosophy.
