Derivative Investigation Coverage — an insuring agreement (known as "Side D" coverage) found within
directors and officers (D&O) liability insurance policy forms. Such
coverage pays the costs associated with investigations of an insured
corporation, although only those involving shareholder derivative claims.
(Derivative claims are brought by one or more stockholders, on behalf of the
corporation, alleging financial loss to the organization. Any recovery in such
suits inures to the benefit of the corporation itself as opposed to the
shareholders who institute the action.) However, investigations may also be
required by various regulatory agencies, including the Department of Justice
(DOJ), the Securities and Exchange Commission (SEC), and others and for which
there is no coverage under "Side D" of the policy.
As part of an investigation, insureds must usually hire outside counsel, as
well as various accounting, financial, and regulatory experts. Such parties
assist the organization in managing document requests, responding to
interrogatories, and providing depositions.
There are three specific drawbacks associated with the investigations coverage
contained within "Side D" of a D&O liability policy. First,
coverage is limited to shareholder derivative demand investigations only.
Second, the vast majority of insurers write Side D coverage with merely a
$250,000 sublimit, a figure that is generally inadequate given the speed with
which investigation-related costs can accrue. Lastly, virtually no excess
D&O insurers will agree to provide "drop down" coverage once the
$250,000 sublimit under "Side D" is exhausted. For example, assume an
insured expends $1.25 million in investigations expense in conjunction with a
derivative claim brought against it. In this situation, its excess insurer will
not cover the $1 million that will not be indemnified by the insured's
primary D&O insurer.