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Side A Difference in Conditions – The D&O Insurance You Think You Have

Monday, November 13, 2023
Mike Richmond
Side A Difference in Conditions, a specific Directors & Officers Liability policy, is one of the most overlooked insurance policies.

This is a difficult time for businesses. With continuing economic pressure, higher interest rates, instability in the commercial lending market and many more issues confronting businesses, it seems like it’s only going to get worse. So, this is a great time to bring attention to one of the most overlooked insurance policies: Side A Difference in Conditions, a specific Directors & Officers Liability policy.

Many companies have Directors & Officers Liability coverage. This protects owners, officers and directors, as well as the company, from any suits alleging breach of fiduciary duty. Common examples include misrepresentation in securing loans and lines of credit, supplying inaccurate or misleading information to investors, breach of due diligence in operating the business and many more.

What Should You Know About D&O Insurance?

The main purpose of a Directors & Officers Liability policy is to protect the individuals associated with the company. That’s why a company purchases the policy. But it turns out these individuals may not be as protected when it comes to the most critical scenario, bankruptcy.

Many bankruptcy courts have found that standard Directors & Officers Liability policies are assets of the company, and therefore, are property of the bankruptcy estate. The reasoning is that the policy is in the name of the business and also includes coverage for the business under Sides B and C of the policy form (Side A covers individuals).

As opposed to policy funds covering defense expenses and settlements levied against the individuals, those funds are brought into the bankruptcy estate for the purpose of paying creditors. This leaves the individuals named in the suit without coverage, thinking the entire time that the company’s Directors & Officers Liability policy was there to protect them.

The Side A Difference in Conditions policy serves two key functions:

  • First, it sits in excess of the base Directors & Officers Liability policy. This provides additional coverage for individual directors and officers in the event a claim erodes the base D&O policy.
  • Second, it provides broader coverage than an ABC policy, and it has the ability to drop down and apply on a primary basis for individual directors and officers in the event the base D&O policy will not respond. This is particularly important in the case of bankruptcy proceedings.

Final Thoughts

In difficult economic environments like we’re currently in, obtaining Side A DIC coverage can be the most important addition to your insurance program. It’s not comparably expensive coverage but is difficult to obtain if the company is exhibiting signs of distress. There’s a strong likelihood that you don’t have this coverage and may assume your base D&O policy covers individuals during bankruptcy proceedings. That’s why Side A DIC can truly be the coverage you think you have.

Contact Horton’s M&A team to evaluate your D&O insurance policy.

Material posted on this website is for informational purposes only and does not constitute a legal opinion or medical advice. Contact your legal representative or medical professional for information specific to your legal or medical needs.