The Layer That Pays When the Company Cannot Indemnify
Directors and officers cover protects individuals against claims arising from their decisions, and it is built in layers with a specific portion reserved for the individuals alone. That reserved layer is the part that actually matters.
Why Directors Need Separate Protection
A director can be sued personally for decisions made in that role. Securities claims, derivative suits, regulatory proceedings, and creditor claims in insolvency all name individuals.
Companies generally indemnify directors against those exposures, through the articles and through separate indemnification agreements, because nobody would otherwise serve.
Two situations defeat indemnification entirely. The company may be legally prohibited from indemnifying, which is the case for derivative suit settlements in several jurisdictions. Or the company may be insolvent and unable to pay.
Both arise precisely when directors are most likely to be sued, which is the structural problem the policy addresses.
The Three Sides
A directors and officers policy is conventionally described in three parts, and understanding the split explains how the product is used.
| Side | Who Is Covered | When It Responds |
|---|---|---|
| Side A | Individual directors and officers | When the company cannot or does not indemnify |
| Side B | The company | Reimburses indemnification it has paid |
| Side C | The company itself | Securities claims against the entity |
Side B is the largest usage in practice, since most claims are indemnified and the policy reimburses the company. Side C, entity cover for securities claims, exists because a securities suit typically names both the company and the individuals and the defence cannot be sensibly divided.
Side A is the smallest in usage and the most important in principle. It is the only part protecting the individual when nothing else will.
Side B and Side C are corporate balance sheet protection. Side A is the reason a qualified person is willing to join a board of a company that might fail. They are sold in one policy and they answer entirely different questions.
The Problem With a Shared Limit
Because all three sides share a single limit in a standard policy, the company can consume the entire cover defending an entity level securities claim, leaving nothing for the individuals when a derivative suit or insolvency claim follows.
There is also a bankruptcy question. If the policy provides entity cover, the proceeds may be argued to be property of the estate, potentially subject to the automatic stay, which can delay individual directors accessing funds for their defence at exactly the moment they need them.
The market response is Side A excess and difference in conditions cover: a separate policy sitting above the main tower, available only to individuals, with no entity cover at all.
Because it never covers the company, its proceeds are considerably less likely to be caught in an insolvency estate, and it cannot be exhausted by entity claims. It is also written with broader terms that can drop down to fill gaps where the underlying policy fails to respond.
Experienced directors, particularly non executives, ask about the size of the Side A layer specifically rather than about the total programme limit.
The Tower
Large programmes are built in layers, with a primary insurer writing the first tranche and excess insurers stacking above it. Each excess layer attaches once the one below is exhausted.
The structure spreads risk across insurers and it introduces a coordination problem, since a settlement requires consent from every layer likely to be reached. Excess insurers can be reluctant to contribute, and disputes among layers about allocation delay settlements that all parties otherwise accept.
The Exclusions That Do the Work
Conduct exclusions remove cover for deliberate fraud and for personal profit to which the insured was not legally entitled. Modern policies apply these only after a final adjudication, so defence costs are advanced until a court actually determines the conduct occurred, which matters because fraud is alleged in nearly every serious claim.
Severability provisions prevent one bad actor conduct or misstatement in the application from voiding cover for innocent directors, which is essential to the purpose of the policy.
The insured versus insured exclusion bars claims by the company against its own directors, on the reasoning that the policy should not fund internal disputes. It is heavily carved back, since a derivative suit is technically brought on behalf of the company, and a bankruptcy trustee suing former directors is stepping into the company shoes. Whether those carve backs are properly drafted determines whether the policy responds in insolvency at all.
What Moves the Price
Pricing responds to securities litigation frequency, industry, market capitalisation, financial condition, and governance quality. Newly listed companies pay substantially more, since the period following a listing is the most claim prone.
The market is notably cyclical, with premiums having risen sharply during periods of elevated securities filings and softened when filings declined, which is the ordinary insurance cycle applied to litigation risk rather than to weather.
The Bottom Line
Directors and officers insurance bundles three different products, and the one that justifies the whole arrangement is the layer covering individuals when the company cannot indemnify them. A shared limit lets corporate claims consume the protection directors were relying on, which is why dedicated Side A cover exists and why it is the item a prospective director should ask about. The exclusions that determine whether it works in an insolvency are the insured versus insured carve backs, which is an unglamorous drafting question that decides whether the policy does the job it was bought for.