Hence, the colossal increase in the purchase of Side A D&O insurance, nowadays with the added protection of a DIC clause, which sports even greater financial protection. For example, a Side A excess insurance policy with a DIC clause cannot be rescinded by the insurance carrier for any reason–even if the company cooked the books during the application process for buying insurance. This protects innocent directors and officers to the fullest from the malfeasance of others.

Not that a DIC is a get-out-of-jail-free card: There are fraud provisions in all D&O policies rendering them useless for proven criminals. But, a DIC clause is written broadly to favor the buyer more than the insurer in claims actions. So it's little surprise that a recent survey of D&O insurance buying trends at Fortune 100 companies indicates 55% to 60% are buying Side A coverage, with the average amount of coverage limits purchased hovering around $57 million. "Most of the Side A coverage sits as excess, in a tower above the standard A, B and C D&O policy," explains Ann Longmore, senior vice president and product leader for D&O at insurance broker Willis Risk Solutions, which conducted the survey.

To the novice, admittedly, all this reads like alphabet soup. So here's a useful glossary of what has become standard fare in corporate D&O–although never to the current extent:

o Leaving aside Side A excess insurance for the moment, standard Side A insurance protects the directors and officers for their liability in situations where the corporation is legally prohibited or financially unable to indemnify them.

o Side B coverage pays on behalf of the corporation the sums it owes to directors and officers for claims it is legally obligated to pay.

But it was still not enough. "Under the law, a corporation could be held liable in its own right, creating a situation where there would be a securities claim with the liability allocated in part to the directors and officers and in part to the corporation," explains Lou Ann Layton, managing director and national D&O practice leader at New York-based Marsh Inc. "This created a dilemma over the final allocation of liability and coverage, resulting often in protracted negotiations."

To solve the dilemma, the industry unveiled a new product–Side C coverage, also called entity coverage, which would protect the corporation itself in a D&O lawsuit. A, B and C became the optimum D&O policy–until a question arose in a recent high-profile bankruptcy case about whether A, B and C could be used to pay defense costs. While the court finally ruled orally that the insurer could cover defense costs, the uncertainty surrounding the issue–no legal precedent is set in an oral ruling–sent shivers down the corporate backbone. Added to this was the fear that the legal costs of defending a company could quickly exhaust policy limits, potentially leaving the personal assets of directors and officers vulnerable to loss.

Where there is risk, there is always some insurer thinking of ways to absorb it. In this case, the insurer is Bermuda-based CODA, for Corporate Officers and Directors Assurance Ltd., now part of ACE Insurance. CODA has been offering separate Side A excess insurance since the mid-1990s. The coverage was designed to sit on top of the standard fares with sides that spring to life when a certain dollar limit was breached. Several companies bought the policy but most passed, believing the risk not worth the added premium. Of course, those were the days when Enron was a highly regarded energy company and Martha Stewart was contemplating her IPO.

CAVEAT EMPTOR

In the brave new world of a bankrupt Enron and a jailed domestic diva, anxious directors and corporate officers clamored for Side A-only insurance, either as a standalone policy providing coverage for first dollar losses on up, or as an excess policy. And where there is frenzied demand, there is eager supply, and today, numerous insurers offer Side A-only insurance, including AIG, Chubb and Lloyd's of London. "Everyone wants to sell it," says Willis' Longmore.

There is an important caveat: Not all Side A policies are alike. "They're all over the place, with all kinds of differences in what is covered, and some of them are not very good," asserts Dan Bailey, a member attorney of Bailey Cavalieri LLC, a Columbus, Ohio-based law firm specializing in D&O defense litigation. "I've seen some policies where they simply take the standard Side A and B policy and simply delete the words 'insuring agreement B,' which in my view offers pretty bare-bones coverage. On the excess side, some have DIC clauses, others do not. CODA has had DIC since the beginning and is regarded as the benchmark. Companies are learning that there are a lot of different policies out there."

New Side A policies are added to the menu every day. In September, for instance, The Hartford Financial Services Group debuted Priority Protection, its Side A-only policy. "We went for two things," says Mike Karmilowicz, Hartford vice president of financial products. "It's nonrescindable, which is built into the product rather than something that must be added on. And it's flexible–you can buy the Side A on a standalone basis that offers coverage from the first dollar up alongside a traditional A, B and C policy, or you can buy it on an excess basis." Limits for either policy are $25 million.

Hartford, it bears noting, is one of the carriers that previously took an A, B and C D&O policy and deleted "insuring agreement B" out, Longmore maintains. "We need more carriers to follow Hartford and write Side A policies from the ground up, with all the bells and whistles [added]," she says. "Stripped-down versions don't do anyone any good."

THE FULL COMPLEMENT

So which side is the right side? Current wisdom, added to the present legal climate and insurance market dynamics, argues that A, B, and C D&O insurance with a separate Side A tower that includes DIC protection is a tough-to-beat combination, offering the broadest protection available. Side A excess insurance typically costs 75% of the rate one pays for a standard A, B and C policy, meaning if the A, B and C costs $100, adding a Side A excess with the DIC thrown in will cost around another $75. With the overall expense of D&O insurance down roughly 10% from the October 2003 to October 2004 policy renewal period, many risk managers are able to add Side A excess with the DIC for not a lot more than what they paid for more traditional D&O in 2003.

Even so, Layton from Marsh notes that D&O insurance is not really a risk manager's buying decision these days. "The decision to buy Side A is being driven by CFOs and board directors saying to their risk manager, 'We need to do this, and I don't care what it costs,'" she explains. "'We need the tools to get the best directors possible and retain them. We have to ensure that their minds are at ease that they are being properly protected.'"

Of course, the toughest question is always how much insurance is enough and how much is too much. The Willis survey indicates that for the Fortune 100, $50 million to $60 million in Side A-only D&O insurance seems to be the average. For companies not in the Fortune 100, the broker says insurance limits range from $5 million to $200 million. There is plenty of insurance capacity for D&O at present (hence the recent softening in premiums), enabling a corporation to put together up to $250 million in excess Side A insurance coverage. Major from Metris, whose prescience in 2001 offers an added measure of protection to his company's directors and officers if the stock drop lawsuit ends badly, advises creativity. "I was able to effect significant cost savings by blending D&O with fiduciary and other exposures, and building a significant Side A tower above it," he says.

As for how much D&O insurance he has in his current program, which renewed in September, Major is mute. "Let me say that for a company our size with the same market cap, we carry more D&O insurance than the average," he comments. "Significantly more."