Author: Priya Cherian Huskins
Directors and officers of companies face the possibility that even if they diligently fulfill their duties to their stockholders, those stockholders may still sue them. Other parties, including government agencies, can sue directors and officers as well. Recognizing that the risk of personal liability makes being a director or officer of a public company unattractive, most companies purchase Directors and Officers insurance, or D&O insurance. This insurance can, in turn, help companies recruit and retain good directors and officers.
The need for D&O liability insurance
D&O insurance is best understood as a type of errors and omissions professional liability insurance that a company carries to protect its directors and officers. It's D&O insurance that responds when directors and officers are accused of violating their duties to stockholders or violating the law, especially federal securities law.
Securities class actions are of great concern for directors and officers because average cash settlements are significant — usually in the tens of millions. Another reason directors and officers are concerned about these lawsuits is because they often take years to settle, resulting in legal defense fees in the millions of dollars.
Beyond securities class actions, directors and officers face lawsuits alleging breaches of fiduciary duty to the company and its stockholders. These suits can either be brought directly or derivatively. In these types of suits, the stockholder seeks damages or restitution to the company.
Note that many securities class actions are also accompanied by tagalong derivative suits premised on the same alleged wrongdoings cited in the securities class action complaint.
Directors and officers are rightly more concerned about derivative suits today than ever before because, in recent years, the plaintiffs' bar has increasingly used them as a vehicle for bringing claims. Like federal securities class actions, these suits can be extremely expensive to defend. Unlike federal securities class actions, however, a company may be prohibited from paying a derivative suit settlement, leaving the personal assets of directors and officers as the sole source of funding in the absence of D&O insurance.
Even so, companies can usually indemnify their directors and officers for their legal fees as well as most settlements. This obligation can arise under personal indemnification agreements, provisions in a company's charter documents or, in some cases, state law. Nevertheless, directors and officers usually insist that their companies buy D&O insurance, if only to respond when the company is unable to do so.
D&O insurance can be seen as a form of balance sheet protection for a corporation's indemnification obligations to its directors and officers. In addition, D&O insurance can protect directors and officers if, during the midst of a long-running lawsuit, their company becomes financially or legally unable to indemnify them.
Outline of a D&O insurance policy
Although a D&O policy can be described in broad terms, a company's overall D&O insurance program is typically comprised of several highly negotiated financial instruments.
Most public companies purchase their overall insurance limits from multiple insurance carriers in layers. Each layer is provided by a different carrier.
The terms of each layer are set by the policy issued by the carrier providing that layer. A company's insurance broker must separately negotiate each of these layers. This process can include negotiating multiple endorsements, or amendments, to an insurer's basic policy form.
The three parts of a typical D&O insurance policy
A classic D&O insurance policy is divided into three parts, all of which share the same single policy limit.
Side A is the part of a D&O insurance policy that responds when a company is unable to indemnify its directors and officers, such as when it becomes insolvent. When triggered, this part of the policy typically pays on a first-dollar basis — i.e., there should be no self-insured retention, which is the amount the insured company must pay before the policy will respond. Side A coverage is often referred to as the "personal protection" part of a D&O insurance contract.
Side B is the part of a D&O policy that reimburses a company for its indemnification obligation to its directors and officers. The vast majority of civil claims brought against directors and officers are indemnifiable. Side B is generally subject to a self-insured retention.
Side C — also known as "entity coverage" — is the part of a public company D&O policy that responds to securities claims made against the company (the coverage grant is somewhat broader for private companies). Side C exists because, in a typical federal securities class action lawsuit, the company is a named defendant along with its directors and officers.
Without Side C coverage, the carrier and the company would have to negotiate how defense and settlement costs are allocated between the uninsured company and the insured directors and officers. This will be a contentious negotiation because any portion of the suit that is allocated to a company without Side C coverage is a portion the insurance carrier doesn't have to pay. Purchasing Side C coverage eliminates this area of dispute.
Like Side B, Side C is typically subject to a self-insured retention. Side B and Side C coverage together are often referred to as "balance sheet protection" for a company.
Side A Difference in Conditions D&O policy
Companies that are comfortable forgoing balance sheet protection may choose to purchase a D&O insurance program that consists solely of Side A coverage.
Most companies, however, structure their insurance program to include a combination of a regular ABC insurance policy and additional Side A-only coverage. These companies will purchase a Side A Difference in Conditions (DIC) policy that sits over a classic ABC policy. It only provides Side A coverage, which is to say that this policy doesn't include Side B or Side C coverage. The "DIC" in the title refers to the fact that this policy, in addition to having a narrower scope of coverage than an ABC policy, will have different terms (i.e., conditions), such as fewer exclusions.
One of the main reasons companies buy a Side A DIC policy is the concern that directors and officers covered by only a classic ABC policy may find themselves without any coverage if their company enters bankruptcy. This scenario, of course, is precisely the moment that the company can no longer indemnify its directors and officers.
This concern arises because, in a bankruptcy, a bankruptcy trustee may attempt to seize the proceeds of a D&O policy that includes Side B and/or Side C coverage for the bankruptcy estate. Such a seizure would leave the directors and officers without coverage unless they had a separate Side A policy on which they could rely.
While some courts have declined to appropriate D&O policy proceeds to the bankruptcy estate, legal experts agree there is a higher probability that a trustee could seize the proceeds of an insurance policy if the policy includes balance sheet protection. The bankruptcy trustee's argument is that the now-bankrupt company paid for the insurance policy and is the intended beneficiary since it's an insured party. Therefore, the bankruptcy court may view the insurance policy as an asset of the now-bankrupt company — and not exclusively as an asset of the directors and officers. A bankruptcy trustee wouldn't have this same argument to seize the proceeds of a Side A policy since the company isn't an intended beneficiary; the only intended beneficiaries of a Side A policy are the company's individual directors and officers.
When companies are doing well, bankruptcy feels like a remote concern. Nevertheless, it's unusual to see a public company buy only classic ABC D&O insurance. Most public companies also buy at least a small amount of standalone Side A coverage in addition to their regular ABC insurance policies because:
- They're being cautious about bankruptcy concerns.
- They find purchasing a Side A DIC policy attractive because it's often subject to fewer exclusions than the Side A portion of a regular D&O policy.
- The Side A-only policy can drop down and respond on a first dollar basis in some circumstances, including if a company refuses to indemnify a director or officer.
This third reason is particularly attractive because it avoids any risk that an individual director or officer would have to pay the Side B self-insured retention if a company refuses to indemnify the individual for an indemnifiable claim. The self-insured retention can be hundreds of thousands — or even millions — of dollars.
Limiting the insureds under a policy
It's possible to limit the insureds under a D&O insurance policy to a subset of all the directors and officers of a company, typically the independent directors. Doing this limits the number of insureds sharing a particular policy's limits. This type of policy is typically referred to as an Independent Director Liability (IDL) policy.
Wealth Security Policy
An individual director's personal umbrella insurance policy will almost always exclude coverage for service as a director for a for-profit company, but the independent directors can buy a personal director liability insurance policy for themselves. Independent directors with significant assets, but for whom having to defend or settle a lawsuit would be financially burdensome, would typically buy a Wealth Security Policy. This policy is an extra means to safeguard personal wealth if the company's D&O policy turns out to be inadequate or unavailable for any reason.
Policy definitions
One of the key areas in play in a D&O policy is the policy's definitions. For example, whether informal Securities and Exchange Commission (SEC) investigations are covered by the policy generally turns on the definition of a "claim," and the answer to this subtle question can mean the difference between being reimbursed for millions of dollars in legal expenses or not. A sophisticated D&O insurance broker can provide guidance on the types of definition modifications available from each insurance carrier.
Policy exclusions
Like all insurance policies, D&O policies won't pay for excluded claims, but the contours of these exclusions are negotiable. For example, fraudulent or dishonest conduct is excluded, but the key point to negotiate is when such conduct becomes excluded. Most insureds would prefer that the conduct exclusion only apply after a final adjudication of fraudulent or dishonest conduct. In this case, the carrier would advance defense costs until the final adjudication. Another option is to allow the carrier to stop spending its policy limits on individuals it considers to be bad actors, preserving the limits for the good actors.
A skilled broker will identify these types of issues for you, make a recommendation based on your company's risk profile and then negotiate with the insurance carriers to obtain the desired result.
Other typical D&O policy exclusions involve risks for which separate insurance coverage can be bought, such as claims related to the Employee Retirement Income Security Act (ERISA).
Rescindability and severability
When a claim involves particularly egregious facts, carriers may consider rescinding the policy. They may argue that the company misled the carrier when it bought the policy and that the carrier would have either charged something different or not offered the policy had it not been misled.
One way of handling this concern is to negotiate for a non-rescindable policy, at least in part. The part of the policy that is most easily obtained on a non-rescindable basis is Side A.
Another way to address the concern that the misconduct of one insured individual could jeopardize coverage for others is to include provisions in the insurance contract that sever bad actors from the policy. These "severability provisions" allow a company to preserve insurance coverage for good actors in the face of unfortunate fact patterns. Obtaining solid rescission and severability provisions is fundamental to the protective strength of a D&O policy.
Claims-made policy
One final note on the structure of a D&O insurance policy: D&O policies are typically "claims-made" policies, as opposed to "occurrence" policies. Under a claims-made policy, coverage lies with the policy that is in effect when the claim is made. By contrast, under an occurrence policy, coverage lies with the policy that was in effect at the time the alleged bad occurrence took place, even if a claim is filed years later.
A further complication, however, is that even though D&O policies are claims-made, they may have a "past acts" date. In this case, the policy won't respond to a claim made during the policy period if that claim relates to a wrongful act that took place before the past acts date. Talk to your broker about whether the past acts date can be eliminated or negotiated as far back in the past as possible.
Selecting the right broker
It's all too common for a company to buy a D&O policy that, by its contractual terms, is unlikely to pay for any claims. Counter-intuitively, even purchasing insurance from a reputable carrier is no guarantee that your company will be issued a good policy.
An insurance policy's pricing, as well as the terms and conditions, are almost entirely driven by the knowledge and skill of the broker placing the insurance contract. For this reason, a company should hire a broker that specializes in D&O insurance and places it regularly. Indeed, it's common for companies to have a specialist place in their D&O policy and to have a different brokerage place the company's other important, but less complex, lines of insurance.
Given the stakes, your choice of a D&O insurance broker is a critical part of the D&O liability risk management process. You're looking for a broker who can:
- Scope and calibrate your specific risk profile
- Provide guidance on the important terms and conditions in a D&O policy contract
- Give you company-specific recommendations for limits of liability based on historical data — and not just peer data benchmarking and industry averages
- Handle issues related to foreign subsidiaries
- Appropriately integrate your personal indemnification agreement with the D&O insurance program
- Consult with you on loss control and risk management policies and activities that can drive down a company's overall D&O insurance premium
- Effectively advocate on your behalf should a claim arise
Avoid sending multiple D&O insurance brokers into the insurance market
Your company will obtain the best possible terms, conditions and pricing for its D&O insurance if it chooses one broker to speak to all insurance carriers. A less effective strategy that some companies employ is asking multiple D&O insurance brokers to place the D&O policy, on the theory that the company will choose the broker presenting the best program. This practice is called "dividing the market."
The problem with the multiple-broker approach is that insurance carriers won't provide a quote for the same company to different brokers; they'll only give quotes for a company to one broker, the "broker of record." As a result, each broker has access to only a portion of the market. The more carriers competing through a single broker, the more leverage that broker has to use market competition to lower the insurance premiums and improve the terms and conditions for the company.
Dividing the market, on the other hand, has the net effect of limiting the number of insurance carriers competing against each other for the same D&O risk. Less competition almost always leads to suboptimal results compared to what could be obtained if the full insurance market were competing for the same D&O risk.
Sending multiple insurance brokers into the insurance market also signals to the market that you aren't a sophisticated buyer — it's not a good look.
Your choice of broker is consequential. The D&O insurance broker you choose will represent you to the carriers you expect to pay claims should the need arise. As a result, your broker's experience and expertise are critical when it comes to your D&O risk management strategy.
Note: An earlier version of this article was first published as Chapter 4 of The Initial Public Offering: A Guidebook for Executives and Boards of Directors. 3rd ed.
Published September 2026
