Side A is the part of a directors and officers (D&O) policy that pays the director directly when the company cannot or will not indemnify. Before accepting a board seat, an independent director should read the policy wording and the indemnification letter, and find out how much of the limit would actually remain for individuals if the company itself is sued.

The document that usually arrives with a board invitation is a certificate confirming a policy and a limit. It does not tell you who else shares that limit, or what is left if the company fails or you have already stepped down when the claim arrives. This page is written for outside and independent directors, from statutory external directors on Israeli boards to fund nominees, and for the companies recruiting them. A general introduction is available at What Is D&O Insurance?.

Key points

  • Side A pays the director personally when the company does not indemnify, whether because the law prohibits it or because the company has collapsed. In a healthy company most claims run through indemnification and Side B, so Side A is tested at the worst possible moment.
  • In a public company the limit is shared. A securities class action against the company (Side C) can exhaust the same limit that protects the directors, unless there is a priority of payments clause or a dedicated Side A layer.
  • A Side A DIC policy sits above the main programme and protects individuals only. It drops down when the underlying layers do not pay, and the insurer usually gives up the right to rescind it.
  • Israeli law allows insurance for some liabilities it bars from indemnification, for example liability to the company itself for breach of the duty of care. Monetary sanctions and fines stay outside both indemnification and insurance, under section 263 of the Companies Law and section 56H of the Securities Law.

Three sides, one limit: what each part of the policy covers

A D&O policy is normally built from three insuring agreements that share a single limit. Only one of them, Side A, pays the director without passing through the company.

Side B reimburses the company for indemnification it has paid. Side C covers the company as a defendant, and in a public company it is usually limited to securities claims. In a private company entity cover is broader, so erosion can also come from customer and employee claims (D&O for private vs public companies). The table summarises the parts of a typical D&O insurance programme.

The parts of a D&O programme and what each one leaves out:

Coverage part What it is meant to respond to Who receives the money The limitation to know
Side A: insured persons, non-indemnifiable loss A claim against a director when the company does not indemnify, because the law bars it or the company is insolvent The director, directly Usually shares one limit with Side B and Side C, subject to wording
Side B: company reimbursement Reimburses the company after it has paid defence costs or a settlement for an officer The company Triggered only after the company pays; the company retention applies
Side C: entity cover Claims against the company itself; for public companies mainly securities claims The company Erodes the shared limit, sometimes very quickly
Side A DIC: dedicated layer Non-indemnifiable loss above the programme, including when underlying layers fail to pay Insured persons only Exists only if purchased; check the drop-down triggers
Outside directorship liability (ODL) A director appointed by a fund to a portfolio company board, under the fund policy (VC and PE fund insurance) The director, as excess cover Usually pays only after portfolio company indemnification and insurance

When the company will not indemnify: the gap Israeli law leaves

The Israeli Companies Law recognises three protections for an office holder: exemption, indemnification and insurance. Each one reaches different situations, and Side A exists for the cases where indemnification is blocked but insurance is still allowed.

An advance exemption (section 259) applies only to breach of the duty of care towards the company, and never to a distribution. Indemnification (section 260) covers monetary liability in favour of another person and reasonable litigation expenses. An advance undertaking to indemnify must be limited to events the board considers foreseeable in light of the company’s actual activity, and to an amount or criterion the board found reasonable. Both must be written into the indemnification letter itself. Insurance (section 261) is wider and can cover breach of the duty of care towards the company itself. So liability to the company, for instance in a successful derivative action, falls outside indemnification and may be covered only by insurance. Section 263 removes all three protections for breach of the duty of loyalty (except insurance and indemnification where the office holder acted in good faith), for intentional or reckless breach of the duty of care and for unlawful personal gain, and for any fine, civil fine, monetary sanction or ransom.

Administrative enforcement by the Israel Securities Authority is stricter still. Section 56H of the Securities Law prohibits insuring an administrative proceeding and prohibits a company from paying a monetary sanction imposed on someone else. The exception covers payments to the injured party and the expenses of the proceeding, which may be indemnified or insured if the articles allow it. The hardest scenario is insolvency. A collapsed company will not indemnify even under a valid letter, and the trustee may be the plaintiff. Section 288 of the Insolvency and Economic Rehabilitation Law requires directors and the CEO to take reasonable steps to limit the extent of insolvency, which opens a route to personal claims.

That is the moment Side A was designed for.

The shared limit: how a claim against the company eats the director’s protection

In a public company a securities class action is normally filed against the company and the directors together, and both draw on the same limit. A high limit on the declarations page does not guarantee that the money will still be there for individuals.

The company’s defence costs and the class settlement come out of that limit, and so does any derivative claim that follows. Allocation between the company and the individuals decides how much is covered, but it does not enlarge the limit. To ring-fence part of it for directors, programmes use one or more of these devices:

  • A priority of payments clause that puts Side A ahead of every other payment.
  • Reinstatement of the Side A limit after erosion by entity claims.
  • A separate Side A DIC layer that the company is not insured under.

Israeli companies listed in the United States, or preparing for an IPO, face higher class action exposure (see D&O for publicly traded companies and insurance for a Nasdaq IPO). Claims over statements about artificial intelligence, such as AI-washing claims, now frequently name board members as well.

Side A DIC: what the separate layer adds

A Side A DIC (difference in conditions) policy is a standalone policy that protects only the insured persons and sits above the regular D&O programme. It adds limit reserved for them, and it drops down when the layers below do not pay.

  • Drop down: pays when an underlying insurer refuses or becomes insolvent, and when the underlying limit is exhausted.
  • Broader terms (DIC): fewer and narrower exclusions than the primary policy.
  • Non-rescindable: the insurer gives up the right to void the policy for misrepresentation in the proposal.
  • Outside the estate: because the company is not insured under it, US courts tend to treat the proceeds as belonging to the individuals rather than to the bankruptcy estate.

Primary forms have broadened in recent years. Some public company wordings replaced the insured versus insured exclusion with a narrow entity versus insured exclusion, or added cover where indemnification is wrongfully refused. The gap the DIC fills has narrowed, but its value in insolvency and in claims naming several individuals at once remains. A layer can also be restricted to directors outside management (independent directors liability), so that claims against management cannot erode it.

Part of the capacity for these layers in the Israeli market comes from Lloyd’s.

The questions a director should ask before signing

Before joining, a director should ask for the full policy wording and the indemnification letter, and a certificate alone is not enough. The table lists the questions to put to the company and its broker, and the answers that justify a closer look.

Questions to ask before joining a board:

Question Why it matters The answer that should raise a flag
What is the limit, and how is the tower built? A headline limit says little until you know who pays first ‘One policy, one limit, no excess layers’
Who else shares the limit? In a public company, Side C and claims against executives draw on the same money No priority of payments clause and no Side A reinstatement
Has a Side A DIC policy been bought? A layer the company is not insured under preserves money for individuals ‘We do not need it, you have an indemnification letter’
How is the insured versus insured exclusion worded? A claim by an insolvency trustee or a derivative claimant can fall into it No carve-back for derivative claims or insolvency office-holders
When does the conduct exclusion apply? An exclusion triggered by allegation lets the insurer stop funding the defence early No requirement for a final, non-appealable judgment
What is the continuity date? It decides which past circumstances remain covered Recently reset, or lost when the company changed insurer
Is there severability and non-imputation? One executive’s knowledge or misstatement should not defeat an independent director’s cover The CEO’s knowledge is imputed to all insureds
Are regulatory investigations covered? An inquiry can run for years before any claim is made Cover only for formal proceedings, nothing for the inquiry stage
What does the indemnification letter say? It fixes the list of events and the cap A generic event list and a cap far below the exposure
What happens when I leave, or the company is sold? The policy pays claims made during its period, including for old acts No commitment to cover former directors or to buy run-off on a change of control

The broker (LAMDA Broking) and the director’s counsel review the policy wording and the indemnification letter side by side, because a mismatch between the two usually surfaces only when a claim arrives.

Fund-appointed directors: two policies, and the order that decides who pays

A director appointed by a venture capital fund to a portfolio company board is usually protected from two directions: the portfolio company’s D&O policy, and outside directorship liability cover under the fund’s policy. The fund cover normally pays only after the portfolio company’s indemnification and insurance are exhausted.

This double excess structure works well while the portfolio company is healthy. When it struggles, each policy may point to the other. Check whether the fund policy, often combined with general partners liability (GPL) cover, responds when the company refuses to indemnify. A second issue is the insured versus insured exclusion: a claim by the fund or another investor against the director can be caught in both policies.

At an early-stage startup the company policy is modest, so the fund cover carries more weight (D&O for startups and technology companies).

Leaving the board or selling the company: who protects the director afterwards

D&O policies are written on a claims-made basis, so they pay for claims made while the policy is in force, even if the act took place years earlier. A former director is protected only while the company keeps buying a policy that covers past office holders.

On a change of control most policies stop covering acts after the transaction, and the acquired company typically buys run-off cover for several years (run-off vs tail coverage). An independent director should make sure the indemnification letter or the appointment agreement obliges the company to maintain that cover.

Israel, the US, Europe and Asia: what changes between legal systems

The law that governs the company decides what may be indemnified, and therefore how much work is left for Side A. Israel and the US share the same basic structure, while Europe and Asia vary more.

United States

Section 145(b) of the Delaware General Corporation Law limits indemnification in derivative suits to expenses, which makes a derivative settlement the classic non-indemnifiable loss. Section 145(g) allows the company to insure liabilities it could not indemnify. The SEC takes the position that indemnification for liabilities under the Securities Act of 1933 is against public policy. US directors joining an Israeli board tend to expect a Side A DIC layer and ask what happens to the cover in bankruptcy.

European Union and United Kingdom

In the UK, section 232 of the Companies Act 2006 voids provisions exempting or indemnifying a director against liability to the company, and section 233 allows the company to buy insurance for the director. In Germany, D&O cover for management board (Vorstand) members must carry a deductible of at least 10% of the loss, up to at least one and a half times fixed annual pay; there is no statutory requirement for supervisory board members. There is no harmonised EU regime for director indemnification.

Asia

In Japan, a Companies Act amendment in force since 2021 requires a board resolution for D&O insurance and disclosure by public companies. In China, the revised Company Law in force since July 2024 expressly recognises director liability insurance and requires reporting to the shareholders’ meeting. Groups with Asian subsidiaries should check whether the master policy is recognised there.

Common mistakes

Most mistakes are made before the appointment, while it is still easy to ask for documents and change terms. Experienced directors make them as often as new ones.

  • Assuming an indemnification letter makes Side A unnecessary. Indemnification depends on the company’s ability and willingness to pay, and both can disappear exactly when the claim is large.
  • Relying on the certificate. It shows a limit and a period, and says nothing about exclusions or the order of payments.
  • Comparing quotes on price alone. Two wordings at the same premium can behave very differently in insolvency.

Frequently Asked Questions

I am an independent director of a public company. Is the company’s D&O policy enough for me?

It may be, subject to the wording. Check whether the limit is shared with entity cover (Side C) and whether a priority of payments clause puts Side A first. A separate question is whether a Side A DIC layer has been bought. In a public company, a class action against the company can erode the limit before claims against directors are reached.

What is the difference between Side A and Side A DIC?

Side A is an insuring agreement within the regular policy and usually shares its limit with the company’s cover. Side A DIC is a separate policy that protects individuals only, sits above the programme and drops down when an underlying insurer does not pay or the underlying limit is exhausted, typically on broader and non-rescindable terms.

Will the policy cover a monetary sanction imposed by the Israel Securities Authority?

No. Section 56H of the Securities Law prohibits insuring an administrative proceeding and bars the company from paying a sanction imposed on someone else, and section 263 of the Companies Law excludes monetary sanctions and fines. The expenses of the proceeding and payments to the injured party may be insurable if the articles permit it and the policy expressly extends to administrative proceedings.

What happens to my cover if the company becomes insolvent?

The company will almost certainly not indemnify, even under a valid letter, and the trustee may be the one suing the directors. Side A becomes the main source of defence funding, subject to the insured versus insured exclusion and whether it carves back claims by insolvency office-holders. In the US a standalone Side A policy tends to stay outside the bankruptcy estate.

I sit on a board on behalf of a fund. Which policy pays first?

Usually the portfolio company’s policy and indemnification pay first, and the outside directorship cover under the fund policy pays only above them. Check whether the fund cover responds when the company refuses to indemnify, and whether a claim by the fund itself is caught by an insured versus insured exclusion in either policy.

I have left the board. Am I still covered?

Only if the company keeps buying a policy that defines former office holders as insureds, because the policy pays claims made during its period. On a change of control it is common to buy run-off cover for several years, and the indemnification letter should oblige the company to maintain that cover after you leave.

Can an indemnification letter replace insurance?

Not entirely. An indemnification letter is limited to the events and the cap written into it, and it depends on the company’s ability to pay. It also reaches only liability to third parties and expenses. Insurance can cover liability to the company itself for breach of the duty of care, and, subject to wording, it may remain available when the company is insolvent. The two complement each other.

An independent director takes on personal liability on the day of joining, and the protection is set by the policy wording and the indemnification letter, both of which can be requested before signing.

The above is general information only and does not constitute insurance, legal or other professional advice. Coverage terms, exclusions and obligations are determined by the specific policy wording and subject to applicable law. Each case should be examined on its merits against the policy wording and with a qualified adviser.