Executive Risk

The ABCs of D&O Liability Insurance Agreements

Directors and officers liability insurance can protect businesses and their executive teams from costly litigation. Learn how it works.

June 26, 2024

The coverage afforded by directors and officers (D&O) liability insurance policies can vary significantly from one policy to the next. Thankfully, most D&O policies follow a common format that allows policies to be easily read, understood and compared by policyholders and their insurance brokers.

A standard D&O policy has three insuring agreements, often called sides A, B and C. These insurance agreements specify the degree of coverage provided by a D&O policy and summarize the insurer's promise to indemnify the policyholder from losses incurred from an insurable event.

This overview describes three insuring agreements found in D&O liability policies.

Side A: D&O Liability Coverage

Side A is the first insuring agreement of a D&O policy. It insures individual directors and officers against losses that the organization is not legally or financially able to indemnify.

This coverage protects the personal assets of directors and officers if the company does not pay defense costs or fund indemnification. It is essential to helping organizations attract qualified individuals to serve on their boards.

Side B: Corporate Reimbursement Coverage

Side B, or corporate reimbursement coverage, is the second insuring agreement of a D&O policy. It reimburses organizations for the expenses they incur when defending their directors and officers in accordance with their indemnification obligations.

By indemnifying their executives, organizations become responsible for paying legal expenses and claim settlements on their behalf. The costs of doing this can be financially crippling for even the largest organizations. Side B coverage, therefore, provides organizations with balance sheet protection by agreeing to reimburse the company if it advances legal fees to officers or directors or indemnifies them against losses.

Side C: Entity Coverage

Often, organizations are named in lawsuits alongside their directors and officers. Side C coverage, sometimes called entity coverage, is the third insuring agreement of a D&O policy. This coverage insures organizations for claims made directly against them by providing entity asset protections and coverage for defense costs.

In policies issued to public companies, Side C coverage is often limited to securities claims. In contrast, coverage for privately held organizations often applies broadly to a wide range of claims against the company arising from wrongful acts by the organization or its directors or officers.