Non-indemnified claims and the case for Side-A DIC Cover
Directors routinely assume that if a claim is made against them, their company will stand behind them. In most cases, it will. But the claims that should concern boards most are not the ones a company is willing to fund. They are the claims that it is legally unable to or ultimately chooses not to.
These are commonly described as non-indemnified or non-indemnifiable claims, and they represent one of the most underappreciated exposures in Australian corporate governance today. They do not arise from a gap in the wording of a D&O policy. They arise from the limits of the underlying indemnity itself, and by the time a director discovers those limits, it is often too late to do anything about it.
Three ways an indemnity can fail
An indemnity typically fails for one of three reasons:
Legal limits
Section 199A of the Corporations Act 2001 (Cth) prevents a company from indemnifying a director for liability owed to the company or a related body corporate, for compensation orders and civil penalties arising under the s1317E civil penalty regime, or for any liability not arising out of conduct in good faith. These are not remote scenarios: insolvent trading and continuous disclosure claims sit squarely within them.
Insolvency
An indemnity is only as good as the balance sheet standing behind it. Insolvency does not just empty that balance sheet, it can reach into the D&O policy itself. Under section 562 of the Corporations Act, a liquidator may seek access to D&O insurance proceeds for the benefit of creditors, ahead of the individuals the policy was intended to protect. Where Side A cover sits inside a shared ABC tower, this risk is real. It is precisely in insolvency related claims brought by liquidators and administrators that directors can face some of their most serious personal exposure.
Corporate refusal
Even where indemnification remains legally available, companies do not always provide it. A director who has fallen out of favour with the board. A claim so reputationally damaging that the board declines to provide support. Genuine uncertainty over whether conduct falls within the good-faith carve-out, resolved conservatively against the director. Each of these scenarios is common in practice, and each can leave an individual director personally exposed at the worst possible time.
Why traditional Side A cover is not always enough
This is where many boards discover that having Side A cover and having adequate Side A protection are not necessarily the same thing. Side A protection typically sits inside the same shared limit as Side B and Side C. If that limit is exhausted meeting the company’s own exposures, most acutely in a securities class action, less remains to protect the individuals the program was originally built around.
This is not a design flaw. It is how a standard shared-limit ABC tower is built to behave, and it is precisely the scenario most likely to coincide with an insolvent or unwilling indemnifier.
The structural answer: Side A DIC cover
A standalone Excess/Difference-in-Conditions (DIC) Side A policy provides dedicated, exclusive limits sitting outside the shared tower, reserved solely for individual directors and officers. Because the company itself typically is not a named insured under a standalone Side A policy, its proceeds are generally less exposed to a liquidator’s reach than proceeds sitting inside a shared ABC tower, providing a degree of protection, but not a guarantee.
Structured on a DIC basis, the policy can drop down where the underlying indemnity or insurance is unavailable, whether due to legal prohibition, insolvency, refusal, or a failure of the underlying policy to respond. It typically carries a single conduct exclusion, rather than the multiplicity of exclusions found in a primary policy, and is written on a severable, non-rescindable basis, so that one insured’s conduct cannot strip cover from another.
Talk to your broker
The true measure of a D&O program is not how it responds when the company can indemnify. It is how it responds when the company cannot or chooses not to.
We recommend reviewing this issue as part of your next D&O renewal discussion.
Contact us to assist with this analysis.
The contents of this publication are provided for general information only. Lockton arranges the insurance and is not the insurer. While the content contributors have taken reasonable care in compiling the information presented, we do not warrant that the information is correct. The contents of this publication are not intended as a legal commentary or advice and should not be relied on in that way. It is not intended to be interpreted as advice on which you should rely and may not necessarily be suitable for you. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content in this publication.
