Side B Coverage
D&O coverage reimbursing the company when it indemnifies directors and officers for covered claims under its corporate bylaws.
What It Is
Side B coverage is the component of a Directors and Officers insurance policy that reimburses the corporate entity when it indemnifies its directors and officers for covered claims. Most state corporate laws permit (and many require) companies to indemnify their directors and officers for defense costs and damages arising from lawsuits related to their corporate duties.
When a D&O claim is filed, the company typically advances defense costs and pays any settlement or judgment on behalf of the individual director or officer pursuant to its indemnification obligations. Side B then reimburses the company for these indemnification payments, transferring the financial burden from the corporate balance sheet to the D&O insurer.
Side B is the most frequently triggered component of D&O policies because most companies are both willing and able to indemnify their leaders in the majority of situations. Side B payments reduce the shared aggregate limit, which is an important consideration for Side A adequacy.
Why It Matters for Brokers
Side B coverage protects the company's financial resources. Without Side B, the company absorbs the full cost of indemnifying its directors and officers, which can be substantial—D&O claims regularly involve $500,000 to $5,000,000 in defense costs and settlements. For small and mid-size companies, a single large D&O claim without Side B reimbursement can significantly impact operating capital.
Real-World Example
A private company's board is sued by a departing minority shareholder for $2.1M, alleging breach of fiduciary duty in a buyout decision. The company indemnifies all 5 board members per its bylaws, advancing $380,000 in legal defense costs over 18 months and ultimately paying a $750,000 settlement. Side B reimburses the company the full $1.13M ($380K defense + $750K settlement). Without Side B, the company—which has $3M in annual revenue—would have absorbed a $1.13M hit to its balance sheet.
Common Mistakes
- 1Not understanding that Side B payments erode the shared D&O limit, potentially reducing coverage available for Side A (individual) claims.
- 2Assuming Side B is unnecessary because the company 'would never sue its own directors'—Side B covers claims from shareholders, regulators, and third parties, not just internal claims.
- 3Failing to coordinate Side B with the company's indemnification bylaws—if the bylaws do not require indemnification, Side B may not trigger in some situations.
How brokerageaudit.com Handles This
brokerageaudit.com's Policy Checker verifies Side B coverage in D&O policies and tracks how Side B claims affect the remaining shared limit available for Side A protection. The system models scenarios showing how Side B payments could erode the limit and recommends appropriate total limits based on the company's size, industry, and governance structure.