A directors' and officers' policy serves three different things under a single cover, and the market calls them by letters. That division is not broker jargon: it maps three distinct legal situations, with three different payees, and a professional who does not distinguish them will misread half the files. The vocabulary is English because the structure came from there, but the mechanism is understood without difficulty.
The first, called A, is the director's own cover when nobody else indemnifies. A director facing a claim incurs defense costs and may be found liable; if its company cannot or will not take that on, the insurer pays directly into its hands. It is the product's historic core, and it is the only part that genuinely protects personal assets. All the others protect corporate cash flows.
The second, called B, is reimbursement of the company. Most companies take on the defense of their directors, through an article of association, a mandate agreement or simply because it would be absurd to abandon the person one appointed. The policy then reimburses the company for what it advanced. The insured in economic terms is here the company, and it is in practice the most used part of the contract, because most files settle without the company defaulting.
The third, called C, is cover for the company itself, but in a narrow case: where it is pursued alongside its directors on a claim relating to its securities. It exists because, in that litigation, separating the director's share from the company's is artificial and expensive: they defend together, on the same facts. That part is not equally useful to every company, and it is beside the point for many that are not listed.
One must then see that those three parts share a single limit, and that is where the mechanism turns sharp. A ten million contract does not offer ten million per part: it offers ten million in all, and every euro consumed by reimbursing the company or by defending the company on its securities is a euro no longer there for the director who has only personal assets. And B and C files mobilize amounts far above those of an individual director.
That observation explains a structure commonly met and worth recognizing: a layer reserved for part A alone, placed above the main contract, which the company cannot touch. Its logic is simple to state: it exists for the day the shared limit has been absorbed by the company, or for the day the company can absorb nothing at all. It is of no use while all is well, which is exactly the definition of a useful cover.
The useful reading therefore comes to two questions asked together. Who is the economic beneficiary of each part of my contract, that is, who receives the money: the director, the company that advanced it, or the company under attack. And what remains for part A if the other two consume the limit first. A director able to answer both knows what the policy guarantees to him personally; one who reads only the figure at the front of the contract believes itself covered for an amount that does not belong to it.
A listed company holds a directors' and officers' policy of 15 million euros across all parts, with no reserved layer. Following an accounting restatement, a collective shareholder action is brought against the company and seven of its directors. Three streams of spending begin. The company advances the defense costs of its seven directors, 4.2 million euros over eighteen months, and claims reimbursement. The company is itself a defendant on the securities claim, and incurs 6.8 million of its own costs. Finally, a global settlement of 9 million takes shape, of which 2.5 million would be borne by two directors personally. What is left for those two?
The total must first be set against the limit, because that is the calculation nobody made at placement: 4.2 million of reimbursement to the company, 6.8 million of the company's own costs, and 9 million of settlement, that is 20 million asked of a 15 million contract. The shortfall is 5 million, and the question is therefore not whether someone will be badly served but who. The answer lies in this lesson's central rule: the three parts share a single limit, and the order of consumption decides. The 4.2 million belongs to part B, the company has already paid and seeks reimbursement; the 6.8 million belongs to part C, the company is a defendant on its securities; the 2.5 million of the two directors belongs to part A, the only part protecting personal assets. Yet B and C together come to 11 million and crystallize early, during the eighteen months of proceedings, whereas the personal share crystallizes only at settlement, that is, last. Only 4 million would therefore remain when part A presents itself, to be shared with the rest of the settlement, and the two directors would face a cover largely absorbed by their own employer. Two observations follow, and the second is what matters for the future. The first is that no fault was committed: the company did what it should in advancing its directors' defense, and the policy responded as written. The second is that the structure which would have changed the outcome is decided at placement and never after: a layer reserved for part A, placed above the main contract and untouchable by the company, exists precisely for that day. It is of no use while all is well, and that is what makes it hard to sell.
- 01Three parts, three payees: the director when nobody indemnifies, the company seeking reimbursement, the company sued on its securities.
- 02Only part A protects personal assets; the other two protect corporate cash flows.
- 03All three share ONE limit: every euro consumed by the company is a euro less for the director who has only personal property.
- 04The order of consumption decides, and it runs against the director: corporate costs crystallize early, the personal share crystallizes last.
- 05A layer reserved for part A is of no use while all is well, which is exactly the definition of a useful cover.