Why D&O Policies Have Two Main Insuring Clauses

A question that often comes up when discussing Directors and Officers (D&O) insurance is why a typical policy may include two main insuring clauses:

1. Directors and Officers Liability, also known as Side A

2. Company Reimbursement, also known as Side B

In simple terms, the two clauses exist to deal with who actually pays the claim. In some situations, the company can pay. In others, it cannot. The policy is structured so it responds appropriately in either scenario.

The Starting Point: Claims Against Individuals

D&O insurance is designed to respond to claims made against individuals including directors, officers and senior managers, for liability to pay compensation relating to decisions made while running the business. This may include damages and settlements, defence costs and legal representation costs but generally does not include fines and penalties.

Companies may, under their constitution or a deed of indemnity, indemnify directors’ and officers’ losses where the individual has acted honestly and in good faith and to the extent permitted by applicable law. 

Where the company can indemnify the director or officer, Side B applies. Where it cannot, Side A applies.

This is the key reason the Directors & Officers Liability and Company Reimbursement clauses exist.

Directors & Officers Liability (Side A)

The Directors & Officers Liability clause provides cover for claims made against directors and officers for liability to pay compensation in circumstances where the company cannot or does not indemnify the individual. 

This may occur in circumstances including, but not limited to, where:

• the company is insolvent or in liquidation

• the company refuses or fails to provide indemnity

• the company has no funds available

In these situations, this clause responds directly for the benefit of the director or officer, covering defence costs and, where not prohibited by applicable laws, settlements or judgments.

Put simply, this part of the policy is to cover a director of officer when the company cannot step in.

Company Reimbursement (Side B)

The Company Reimbursement clause applies where the company is able to indemnify its directors or officers and does so.

The process generally includes the following steps:

1. A claim is made against a director or officer
2. The company provides notice of claim to the insurer
3. The company pays defence costs or settlement under its indemnity or constitution obligations
4. The company provides all necessary documentation to the insurer
5. Upon acceptance of the claim the insurer reimburses the company under the Company Reimbursement clause

Why the Excess is Different 

One practical difference between Side A and Side B cover is how the excess applies.

Directors & Officers Liability – Side A cover is often structured with a nil excess. This reflects its purpose, which is to provide protection to individuals where the company cannot indemnify them, often in insolvency scenarios. 

Company Reimbursement – Side B cover, on the other hand, commonly includes an excess. Where the company is financially able to indemnify, it is expected to retain part of the risk.

Why Both Clauses Matter

Side A and Side B cover respond to different indemnity situations, depending on whether the company is able to pay.

In practice, this generally means that:

• individuals are protected when the company cannot indemnify them (other than for losses that are not insurable by law)

• the company is reimbursed when it does meet its indemnity obligations

When discussing D&O cover, it is worth reinforcing that:

• Directors and Officers Liability provides personal asset protection and usually has a nil excess

• Company Reimbursement protects the company and usually has an excess

• Both clauses often share the same policy limit, making limit selection important

Understanding this structure can help explain, at a high level, how cover may respond in different claim scenarios.

Important Notice

Berkley Insurance Company (limited company incorporated in Delaware, USA) ABN 53 126 559 706 t/as Berkley Insurance Australia is an APRA authorised general insurer. Information provided is general only, intended for brokers and has been prepared without taking into account any person’s particular objectives, financial situation or needs. Insurance cover is subject to terms, conditions, limits, and exclusions. Underwriting criteria applies. When making a decision to buy or continue to hold a product, you should review the relevant policy documents.