What happens when a corporation is unable or unwilling to indemnify its individual directors and officers against their personal-liability and defense costs?

One example might be a claim made against an individual when a corporation is insolvent or in bankruptcy proceedings and not permitted to pay legal expenses or indemnify claim payments incurred by its directors or officers. Another example is when a corporation is forbidden by law from indemnifying its directors—which is often the case with shareholder derivative litigation.

This is where “Side A insurance” is designed to provide individual directors and officers with a safety net against financial loss from personal liability.

But in the case of multinational companies, structuring a compliant program to manage global D&O risk is never simple. And if a D&O program is not designed thoughtfully, two main areas of risk begin to emerge for a company and its directors, ultimately threatening their personal assets: execution risk and compliance risk.

The key to mitigating both risks is to ensure that the program is customized to manage each of the three sides of D&O insurance effectively, by clearly distinguishing how the program will work in practice. This means looking closely at how the three types of D&O coverage operate in connection with where the risks are located and where claims can be paid.

Many insurers issue a single global insurance policy to the parent company in the parent's jurisdiction, intended to insure the parent's directors and officers as well as those of its foreign subsidiaries, affiliates and joint ventures.

However, certain countries, including the BRIC economies (Brazil, Russia, India and China) as well as Mexico and Japan, either impose strict conditions on companies operating within their borders or prohibit the purchase of insurance for local risks from insurers not licensed there. In such cases, the company can mitigate this compliance risk by purchasing local policies covering all three areas of D&O risk, in addition to a master parent policy.

But this does not eliminate execution risk. Distinct classes of insureds may actually be competing for a finite amount of Side A insurance capacity, and individual directors could be left with no coverage at all for these claims. This is because claims made under Side B and Side C insurance will typically begin to exhaust the cover before the Side A claims start to materialize.

For Side B and Side C insurance, a master policy may add supplemental insurance to the parent (in addition to local policies) for the parent's insurable interests in its local affiliates. The critical Side A coverage may then be purchased separately and locally.

In today's increasingly complex business environment, a global offering of different coverages protecting distinct parties against different types of liability may not work everywhere and may be subject to challenge—either from a company's directors or officers who understandably expect certainty; or from local regulators who demand compliance. It is only by separating the respective elements and understanding their interplay that a multinational company can protect itself and its people adequately.