What Is Corporate Reimbursement Coverage?
Corporate reimbursement coverage is a form of liability insurance that companies purchase to protect themselves against losses due to legal actions against their directors and officers. It is one of three components of directors and officers (D&O) liability coverage. (Directors and officers (D&O) liability coverage also includes side A, side B, and side C coverage. Corporate reimbursement coverage is known as side B coverage.)
- Corporate reimbursement coverage is one portion of directors and officers (D&O) liability insurance.
- Companies purchase corporate reimbursement coverage in order to protect themselves against losses due to legal actions against their directors and officers.
- While directors and officers (D&O) liability insurance is largely structured to protect the individual executive against losses, the corporate reimbursement feature also covers any losses the firm itself might suffer as a result of legal action against individuals.
Understanding Corporate Reimbursement Coverage
Corporate reimbursement coverage is one portion of directors and officers (D&O) liability insurance. This type of liability insurance is largely structured to protect the individual executive against losses, but the corporate reimbursement feature also covers any losses the firm itself might suffer as a result of legal action against individuals.
The need for side B coverage is driven by the indemnification obligation that companies bear for the sake of their executives. Generally, this obligation is made explicit in the firm’s bylaws or articles of incorporation. This provision requires that the company protect, or pay for legal representation of, executives facing legal action as a result of fulfilling their duties to the firm. This obligation is general in nature, and executives often negotiate the specifics of their indemnifications as part of a personal contract when they join the company. This is important because the side B portion of a firm’s D&O policy can only cover losses from claims filed against the individual executive, not the company itself.
Common reasons for such legal action include:
- Violation of fiduciary obligation to shareholders.
- Failure to satisfy workplace safety regulations.
- Theft of customers from competing firms or former employers.
- Misrepresentation of corporate assets or financial situation.
Types of Directors and Officers (D&O) Liability Coverage
The other two components of D&O coverage are known as side A and side C. Side A covers executives’ financial losses when the company is unable to fulfill its indemnification obligation. This inability is most common in bankruptcy, and side A coverage forces the insurer to finance the legal defense.
Side C is the least common of the three components of D&O liability coverage, and is generally only purchased by public companies. Side C specifically protects these companies against claims made in connection with the companies’ securities.
Investors often sue a company and its managers regarding the value of its securities, claiming some form of mismanagement or misrepresentation. When this happens, the company will file a side B claim to cover the costs of defending its executives. Assuming the firm owns a side C policy, it will also take side C action to cover any losses resulting from the suit against the company itself.