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D&O Insurance

What Are the Insuring Agreements in a Typical Director and Officers’ Policy?

D&O insurance is corporate insurance that provides financial coverage to the executive rank holders in a company. The supreme rank holders in an organization have several duties and corporate responsibilities to meet. They are answerable to the employees, shareholders, consumers, and everyone associated with the company if there is a mismatch in their actions and duties. If the mismanagement in their duties causes financial loss to the company or anyone associated with the organization, they can get legal allegations and charges. In such times, the only way to defend their ground is by opting for legal methods to remove the allegations. 

Understand how the D&O policy works: An example will help you understand better. Suppose, the director or an officer in the company allegedly fails to meet the corporate duties and responsibilities. As a consequence, of the mismanagement and negligence of duties, there is a loss encountered by the company. To remove the legal allegation brought by the employees (or any external or internal claimant), the officer has to take the legal path.

In such times, if the person has a D&O policy, they can mitigate the financial risks and manage the problems conveniently. All they require is to inform the D&O insurer or broker and claim for the liability coverage. On successful claim settlement, the insured officer can retrieve the complete legal expenditure amount through the coverage agreements of the D&O policy. The coverage from the insurer includes the defense costs and any settlement. 

The need to learn about the agreements

Before understanding the different types of agreement clauses present in a D&O policy, know how the agreement works. What is an agreement in insurance and, how is it useful? 

An agreement in liability insurance is a clause that determines the coverage aspects. There can be more than one agreement in an insurance policy. By the policy agreement clause, the insurer agrees to meet the expenses for the legal proceedings and other coverage aspects. The insurance company pays for the losses and legal charges on account of the legally enforceable agreement that ensures claim coverage. 

It is crucial for you as a policyholder to know about the agreements. Without knowing the different agreement parts in the D&O policy, how can you understand whether the policy will work rightly for you? Hence, read every clause present in the agreement thoroughly and clarify each doubt related to the D&O policy from the insurance seller or broker. 

Agreements in D&O policy: The Director and Officers’ liability insurance policy contains three agreements. They are – 

  1. Side A
  2. Side B
  3. Side C

Read along and understand what each side or agreement of the D&O insurance offers to the insured person/entity. 

Side – A – Coverage agreement for Non-indemnified corporate losses

The Side-A is the first agreement of a typical D&O policy. The coverage aspects mentioned in this agreement clause helps in defining the protection norms for the high-ranked executives and directors. The Side-A insuring agreement is functional when the organization cannot legally indemnify the executive rank holders. Through this clause, the insurance provider is bound to assist the director or officer with the defense costs and other settlements. The allegations for which the officers and directors can get financial support are – acts of corporate negligence, breach of professional duties, etc. 

The Side-A agreement in the D&O policy has a crucial role in safeguarding the supreme rank holders in the company. It is highly effective in ensuring the safety of their assets as meeting the legal expense in defending procedures can be highly costly. 

Points to note about Side-A agreement- 

  • The Side-A agreement in a D&O policy is only applicable for the executive professionals and invalid for the organization or associated company.
  • The Side-A agreement in the liability policy for Directors and Officers does not have policy deductibles.
  • Additional clauses in a Side-A agreement for the D&O policy are there, which are worth considering. 

Side – B – Corporate reimbursement norms

The Side-B agreement in a D&O policy is also termed as the Corporate reimbursement agreement clause. The insurance agreement – B is advantageous for the corporation or organization as it reimburses the expenses for indemnification obligation to the high-ranked officials and directors. Through the agreement clauses of the Side-B part of a D&O policy, the insurer is obliged to reimburse the claims to the private organization. Here the insured entity is the company and not the individual professionals in the company. 

  • Importance of Side – B agreement in D&O policy: The Side-B agreement part in the policy helps in safeguarding the assets of the company that can get drained in meeting the legal expenses for liability coverage. The agreement in the D&O policy acts as a balance sheet protection for the company. The insurer comes into the scene when the organization needs to financially support the management in the defending course. The insurer reimburses the amount spent on the legal actions and transfers it under the name of the company(the policyholder in this case).

Side – C – Coverage for entities

The Side-C agreement in a D&O policy refers to the entity securities coverage. There are different types of D&O policies with varied coverage norms. In some policies, there are a few coverage aspects, reserved for publicly listed organizations and companies. Through this policy agreement, the corporate entities can get protection from liability exposures. The scope and coverage benefits are distinct for the private and publicly listed companies. In the public-listed organizations, the Side-C clause covers the liabilities generated from the security claims. In contrast, the Side-C clause for private companies covers the lawsuits against the company itself. 

Agreements you must include in the policy.

Anyone having an overall idea of the D&O coverage norms would always advise you to include the Side-A agreement to safeguard the personal assets of the high-ranked officials. But, what about the rest? It is best to consult an insurance expert before including the agreement in the D&O policy. Depending on the company requirements and liability assessment, the inclusion of agreements can be subjective. Seek the assistance of a qualified insurance broker or directly connect to the insurance seller to clarify the doubts before buying. 

Connect to PlanCover

PlanCover, the leading insurance broker in the country, can guide you with the agreements to include in the D&O policy. Connect to PlanCover and find a suited D&O policy that meets the requirements.

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