{"id":4520,"date":"2026-05-08T15:41:04","date_gmt":"2026-05-08T15:41:04","guid":{"rendered":"https:\/\/www.insuracarelife.com\/blog\/red-flags-everywhere-ten-risks-for-directors-week-10-morrison-foerster-llp\/"},"modified":"2026-05-08T15:41:04","modified_gmt":"2026-05-08T15:41:04","slug":"red-flags-everywhere-ten-risks-for-directors-week-10-morrison-foerster-llp","status":"publish","type":"post","link":"https:\/\/www.insuracarelife.com\/blog\/red-flags-everywhere-ten-risks-for-directors-week-10-morrison-foerster-llp\/","title":{"rendered":"Red Flags Everywhere! \u2013 Ten Risks for Directors \u2013 Week 10 | Morrison & Foerster LLP"},"content":{"rendered":"
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D&O Insurance and Indemnification: Understand Your Safety Net Before You Need It<\/p>\n

Each week for the next 10 weeks, we will publish an installment of our Red Flags Everywhere! series, highlighting key risk areas that public companies and their board of directors should keep top of mind.<\/p>\n

This series will serve as a lead up to MoFo\u2019s upcoming Red Flags and Red Wine Tabletop program taking place in our Palo Alto office on May 7. Members of our Securities Litigation, Employment and Labor, and Capital Markets Groups will guide attendees through a ripped-from-the-headlines fact pattern designed to spark interactive discussion and practical analysis that will be valuable to every board advisor.<\/p>\n

This week, we focus on D&O insurance and indemnification. Directors should understand how their company\u2019s D&O insurance program is structured, what it covers (and what it does not), and the scope and limits of their indemnification and advancement rights\u2014before a claim arises. This alert includes contributions from Lenin Lopez<\/strong> of Gallagher.<\/p>\n

If you are interested in learning more about MoFo\u2019s Red Flags Everywhere tabletop event, please reach out to Deborah Argueta. See all the Red Flags client alerts.<\/p>\n

<\/p>\n

How D&O Policies Are Typically Structured: Sides A, B, and C<\/h4>\n

Standard D&O policies typically cover three types of losses, commonly referred to as Side A, Side B, and Side C coverage:<\/p>\n

    \n
  • Side A<\/strong> covers individual directors and officers directly when the company is unable or unwilling to indemnify them. This is particularly important coverage for individual directors because it responds when the company cannot stand behind them, for example, when the company is insolvent or when indemnification is legally prohibited. Side A coverage typically has no retention (i.e.<\/em>, no deductible), meaning the insurer pays from the first dollar of loss.<\/li>\n
  • Side B<\/strong> reimburses the company for amounts it pays to indemnify directors and officers. When a company advances defense costs or pays a settlement or judgment on behalf of a director, Side B reimburses the company for those expenditures. Side B coverage is subject to a retention, whereby the company bears a specified amount of loss before insurance responds.<\/li>\n
  • Side C<\/strong> reimburses the company for defense costs and settlements of securities claims asserted directly against the company, typically claims brought under the federal securities laws. Side C is often referred to as \u201centity coverage.\u201d<\/li>\n<\/ul>\n

    Understanding the interplay among these three sides is critical. Because Sides A, B, and C typically share a single aggregate policy limit, a significant securities class action against the company (covered by Side C) can consume policy limits that would otherwise be available for directors\u2019 personal defense costs (covered by Side A or Side B). For this reason, many companies purchase a standalone, dedicated Side A policy\u2014sometimes called a \u201cSide A DIC\u201d (difference-in-conditions) policy\u2014that provides an additional, independent layer of protection exclusively for individual directors and officers.<\/p>\n

    Retentions.<\/strong> A retention is often compared to a deductible, but they work a little differently. Unlike a deductible, a retention is the amount the insured must pay for losses and defense costs before the insurer is required to pay. Side A coverage for individual directors and officers typically carries no retention, so the insurer pays from the first dollar. Side B and Side C coverage, by contrast, carry a retention, which can range from modest amounts to several million dollars, depending on the company\u2019s size, risk profile, and the other features of the D&O policy (e.g.<\/em>, total limits, premium) that the company obtained. The retention amount is an important economic decision: a higher retention increases the company\u2019s out-of-pocket exposure but generally reduces premium costs.<\/p>\n

    Key Considerations When Deciding How Much Insurance You Need and Retention Size<\/h4>\n

    Selecting the right amount of D&O coverage and setting the retention level are judgment calls that should be informed by several factors:<\/p>\n

      \n
    1. The company\u2019s size.<\/strong> The company\u2019s size and market capitalization are one of the most used benchmarks for D&O insurance purchasing because securities class action settlements tend to correlate with the magnitude of alleged investor losses. Larger-cap companies generally carry higher policy limits. Directors should understand how the company\u2019s coverage compares to similarly situated peers and whether coverage levels have kept pace with the company\u2019s growth.<\/li>\n
    2. The company\u2019s risk profile.<\/strong> The nature and complexity of the company\u2019s business, its industry, its litigation history, its stock price volatility, and recent enforcement trends all bear on the amount of coverage the company needs. Companies operating in highly regulated industries\u2014such as financial services, healthcare, life sciences, or energy\u2014tend to face a greater frequency and severity of claims. In addition, AI companies are experiencing a sharp increase in claim activity driven by high investor expectations and intense regulatory scrutiny. Similarly, companies undergoing significant corporate events (IPOs, mergers, restatements, or management transitions) face elevated risk.<\/li>\n
    3. The regulatory landscape.<\/strong> The breadth and aggressiveness of the regulatory environment in which the company operates should factor into the coverage analysis. Companies subject to oversight by multiple regulators\u2014such as the SEC, DOJ, banking regulators, or state attorneys general\u2014may face simultaneous investigations and enforcement actions that generate significant defense costs. Directors should consider whether the current program is designed to respond to multiple overlapping proceedings.<\/li>\n<\/ol>\n

      Evaluate the retention in light of the company\u2019s financial position.<\/strong> The retention should be set at a level the company can comfortably absorb. A company with strong liquidity may benefit from a higher retention in exchange for lower premiums. But directors should consider whether the company could meet the retention obligation in a stressed financial environment, particularly in a scenario where claims coincide with financial difficulty.<\/p>\n

      Key Provisions to Look for and Understand<\/h4>\n

      D&O policies contain a number of provisions that can significantly affect the scope of coverage when a claim arises. Directors should pay particular attention to the following:<\/p>\n

        \n
      • Coverage for Investigations<\/strong>\n

        Investigations by regulators, legislative bodies, or internal committees can generate substantial defense costs well before any formal proceeding is filed. As a general matter, modern public D&O policies will typically cover defense costs and expenses incurred by directors and officers in an SEC investigation. Unfortunately, most policies won\u2019t provide coverage of defense costs when your company is facing an informal inquiry.<\/p>\n

        Given the nuances across different policy forms, it\u2019s worth understanding whether your company\u2019s policy covers investigation costs, including costs incurred in responding to subpoenas, document requests, stockholder books and records demands, investigations in response to stockholder demands on the board, witness interviews, and informal inquiries. Not all policies define \u201cclaim\u201d broadly enough to encompass pre-enforcement investigations, and some require a formal proceeding or written demand before coverage is triggered. Understanding when coverage begins\u2014and whether it extends to informal or preliminary government inquiries\u2014is critical, particularly in an enforcement environment where investigations can last for years and generate millions of dollars in legal fees before any formal proceeding is initiated.<\/p>\n<\/li>\n

      • Exclusions for Insured vs. Insured Litigation<\/strong>\n

        Most D&O policies contain an \u201cinsured vs. insured\u201d exclusion that bars coverage for claims brought by one insured person or entity against another. The original purpose of this exclusion was to prevent collusive lawsuits, for example, a company suing its own directors to manufacture an insurance recovery. But the exclusion can have unintended consequences. It may, for example, bar coverage when a bankruptcy trustee (standing in the shoes of the company) sues former directors, or when a special litigation committee brings claims against fellow directors. Directors should understand the scope of this exclusion and negotiate appropriate carve-outs, including for derivative suits, claims brought by a bankruptcy trustee or receiver, whistleblower claims, and employment-related claims brought by one insured against another.<\/p>\n<\/li>\n

      • Protections in the Event of Bankruptcy<\/strong>\n

        When a company enters bankruptcy, D&O insurance often becomes one of the few remaining sources of protection for individual directors and officers. But bankruptcy also creates competing claims on the policy. Creditors, trustees, and litigation trusts may seek to access the same policy that directors need for their personal defense. Side A coverage, because it responds only when the company does not indemnify, becomes especially important in an insolvency scenario. For that reason, it\u2019s worth confirming that the company carries a dedicated Side A policy or a Side A DIC policy that sits outside the primary program and cannot be reached by creditors or the bankruptcy estate. It\u2019s also advisable to confirm whether the main Side A\/B\/C D&O policy contains a \u201cpriority of payments\u201d provision, which gives individual insureds\u2019 claims priority over entity claims when policy limits are under pressure.<\/p>\n<\/li>\n<\/ul>\n

        Indemnification and Advancement: Basics and Limitations<\/h4>\n

        D&O insurance is only one part of the director protection framework. Corporate indemnification and advancement of expenses are equally important, and in many situations, they are the first line of defense.<\/p>\n

          \n
        • The Basic Framework<\/strong>\n

          Director indemnification is a product of state law, corporate governance documents, and contract. Under Delaware General Corporations Code Section 145, a Delaware corporation may indemnify a director for legal expenses (including attorneys\u2019 fees and settlements) incurred in defending a matter arising from the director\u2019s service, provided the director \u201cacted in good faith and in a manner the person reasonably believed to be . . . in the best interests of the corporation.\u201d DGCL 145.<\/p>\n

          Most public companies go beyond permissive indemnification and provide mandatory indemnification and advancement through their articles of incorporation or bylaws. Advancement is critically important because it ensures that directors are not forced to fund their own defense out of pocket while a case is pending.<\/p>\n

          That said, bylaws that address indemnification and advancement are typically light on details regarding process, which is why directors are best served by also having an indemnification agreement that is thoughtfully constructed. For example, your indemnification agreement should specify what types of events trigger indemnification and\/or a right to an advancement of expenses. This is especially important in cases when you become the subject of an investigation or claim, and you would like to (and should) engage an attorney to represent you. Any delay in wading through what should be administrative concerns at this stage could negatively impact your ability to appropriately respond to an investigation or claim.<\/p>\n<\/li>\n

        • Delaware Law Limitations<\/strong>\n

          Delaware law imposes an important limit on director indemnification: a corporation may not indemnify a director who is found\u2014by final judgment\u2014to have acted in bad faith, or who is found to have engaged in intentional misconduct or a knowing violation of law. This limitation applies regardless of what the company\u2019s charter, bylaws, or indemnification agreement may say. It means that even the most generous indemnification provision cannot protect a director from the financial consequences of conduct that a court determines was not undertaken in good faith. Delaware law does permit a corporation to advance costs for defense of claims alleging bad faith, but in the event there is a final determination that the director engaged in bad faith, he or she would be required to reimburse the company for the previously advanced defense costs.<\/p>\n

          Additionally, directors should be aware that indemnification rights can be modified or, in some cases, restricted by subsequent board or stockholder action. Indemnification agreements that are individually negotiated and executed provide more durable protection than bylaws alone, which can be amended. For this reason, it\u2019s important for directors to have a have a current, fully executed indemnification agreement and understand its terms.<\/p>\n<\/li>\n<\/ul>\n

          Key Takeaways<\/h4>\n
            \n
          1. Understand the structure of your D&O program.<\/strong> Know the difference between Side A, Side B, and Side C coverage, and confirm whether the company carries a dedicated Side A or Side A DIC policy that provides protection independent of the primary program.<\/li>\n
          2. Assess coverage adequacy regularly.<\/strong> Coverage needs change as the company\u2019s risk profile, market capitalization, regulatory exposure, and business complexity evolve. Directors should evaluate the company\u2019s insurance coverage before joining a board, and ensure that the insurance program is reviewed at least annually and adjusted as necessary.<\/li>\n
          3. Ensure legal review and market check of the D&O policy.<\/strong> Do not assume the policy covers every scenario. Ensure there is proper legal review by internal and external counsel of whether and to what extent investigations are covered, the provisions in the case of insolvency, and any other meaningful exclusions and carve-outs. Directors should also make sure they understand the market trends for D&O coverage. Consider inviting the broker to be part of the discussions to hear their views on coverage directly.<\/li>\n
          4. Understand your indemnification and advancement rights.<\/strong> Confirm that you have a current, fully executed indemnification agreement that provides for mandatory advancement of defense costs. Understand that Delaware law prohibits indemnification for bad-faith conduct\u2014and that Side A insurance is designed to help fill that gap.<\/li>\n
          5. Do not wait for a claim to understand your protections.<\/strong> The time to review your D&O insurance and indemnification rights is now\u2014not when you receive a subpoena, a demand letter, or a complaint. Directors should understand the limits of indemnification and the ways in which insurance may be able to help fill those gaps.<\/li>\n<\/ol>\n

            The prior Red Flags alerts are available here:<\/p>\n

            [View source.]<\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

            D&O Insurance and Indemnification: Understand Your Safety Net Before You Need It Each week for the next 10 weeks, we will publish an installment of our Red Flags Everywhere! series, highlighting key risk areas that public companies and their board of directors should keep top of mind. This series will serve as a lead up […]<\/p>\n","protected":false},"author":1,"featured_media":4521,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[2443,3330,2901,2132,2900,2045,283,236,2232],"class_list":["post-4520","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-blog","tag-directors","tag-flags","tag-foerster","tag-llp","tag-morrison","tag-red","tag-risks","tag-ten","tag-week"],"_links":{"self":[{"href":"https:\/\/www.insuracarelife.com\/blog\/wp-json\/wp\/v2\/posts\/4520","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.insuracarelife.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.insuracarelife.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.insuracarelife.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.insuracarelife.com\/blog\/wp-json\/wp\/v2\/comments?post=4520"}],"version-history":[{"count":0,"href":"https:\/\/www.insuracarelife.com\/blog\/wp-json\/wp\/v2\/posts\/4520\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.insuracarelife.com\/blog\/wp-json\/wp\/v2\/media\/4521"}],"wp:attachment":[{"href":"https:\/\/www.insuracarelife.com\/blog\/wp-json\/wp\/v2\/media?parent=4520"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.insuracarelife.com\/blog\/wp-json\/wp\/v2\/categories?post=4520"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.insuracarelife.com\/blog\/wp-json\/wp\/v2\/tags?post=4520"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}