By Nicholas J. Price
Board directors of all types of entities are subject to meaningful personal liability in relation to their duties and responsibilities as a director. This includes directors and trustees of public corporations, private corporations, colleges and universities, hospitals and healthcare institutions, government bodies, educational and religious institutions, charitable institutions and nonprofits. The purpose of a directors and officers liability insurance policy is to protect the personal assets and property of board directors when acting in the course of their official duties as directors.
Regardless of which type of entity board directors serve, today’s legal environment is inherently litigious. Factors such as size, function, degree of risk, coverage limits and type of coverage play a role in the cost of directors and officers liability insurance premiums.
Directors and officers liability insurance policies aren’t standard across the board. Insurance professionals assist corporations and other entities with designing a custom policy that’s geared toward the needs of the organization.
Key Features of a D&O insurance Policy
The very first section of all insurance policies is an explanation of terms. This is an important part of a D&O board of director insurance policy because it clarifies that individuals, in addition to board directors and officers, receive coverage under the policy.
Directors and officers liability insurance policies offer a broad definition of an “insured.” Board directors, officers, spouses of directors and officers, employees, staff, volunteers, committee members and the organization as a whole are all considered insureds under D&O policies. Some D&O policies afford coverage for claims made against the organization even if the suit doesn’t name individual directors or officers. D&O policies also cover the personal property and other assets of directors and officers and their spouses.
Coverage limits for D&O board of director insurance policies vary substantially. Typically, insurance agents assist boards in determining adequate limits based on the size of the organization’s assets. Boards can generally choose from $1 million to $25 million in general liability coverage.
Deductibles for D&O insurance policies also vary substantially. D&O policies for nonprofits and small corporations may range from zero to $2,500. Larger entities may offset larger premiums with larger deductibles of from $5,000 to $25,000.
Employment Practices Coverage
An important type of coverage under directors and officers liability insurance policies covers employment practices. Claims for such things as wrongful termination, sexual harassment, discrimination, and unfair hiring and firing practices are common with D&O policies.
“Duty to Defend” and Defense Expenses Outside the Limits of Liability
The term “duty to defend” means that insurance companies are committed to the fair resolution of claims. It’s generally accepted that insureds only have to prove that there’s a potential for a claim to ask an insurance company to defend them.
Most policies also afford insurance coverage for unlimited defense expenses incurred. This type of expense doesn’t diminish the overall limit of liability listed on the D&O policy. Most insurance companies also provide coverage retroactively for prior wrongful acts.
D&O Risks for Nonprofit Board Directors: Guidance and Caution
Nonprofit board directors accept many of the same duties and responsibilities as directors of for-profit corporations. Both are responsible for their organization’s financial stability, oversight, and achieving goals and objectives. However, there is one important difference that enhances risks for nonprofit board directors.
Board directors of for-profit entities are subject to external forces such as regulatory authorities and laws that pertain to for-profit entities, whereas the design of the nonprofit corporate structure allows nonprofit board directors to be largely self-supervising. Without strong third-party oversight, some board directors may be inclined to become careless or complacent, placing them at a higher risk for directors and officers liability insurance claims.
Other issues that are inherent with nonprofit organizations also increase the propensity for D&O board of director insurance claims. Nonprofit board directors are often less familiar with the best practices and other particulars of board service than corporate directors. As a result, nonprofit boards may operate less efficiently than their for-profit counterparts. Nonprofit organizations may be more vulnerable to claims because nonprofit board directorship is a part-time activity with no compensation.
A board portal management software system is a huge asset for nonprofit board directors who need to keep firm control over their board duties and responsibilities. In addition, board governance tools, such as Governance Cloud by Diligent, assist boards in their fiduciary duties and assurance of compliance.
Insurance companies also recognize that nonprofit organizations don’t have the same robust support that for-profit companies have. Lack of resources may cause nonprofit board directors to make hasty decisions without first making careful investigations. Not having the proper time to address issues and not taking time to document matters appropriately could subject nonprofit board directors to claims.
D&O board of director insurance claims can come from a variety of constituents and sources. In addition to the common types of employment practices claims noted earlier, nonprofit boards may also be subject to claims over inefficient administration or supervision, wasting assets, libel, slander, failing to deliver services, providing misleading reports or other misrepresentation, or providing acts beyond the authority they were granted.
D&O Policy Damages Are Costly
Damages for D&O insurance claims can be devastating in nature, even for small corporations and nonprofits. In cases where board directors are found guilty, damages can easily exceed their family’s net worth.
In addition to lawsuits and potential adverse judgments, board directors may be required to pay the cost to defend their organization and its executives, employees or volunteers who are named in a lawsuit.
The most recent Wyatt Nonprofit Organizational Directors’ and Officers’ Liability Survey indicates that the average cost for nonprofit organizations to defend a lawsuit ranged from $35,000 on the low end to $100,000 on the high end. The survey also reported that the cost of indemnity payments from adverse judgments averaged about $457,000.
Misperceptions About Personal Liability and Personal Umbrella Insurance Coverage
Board directors, particularly nonprofit board directors, may incorrectly assume that their personal liability insurance and umbrella insurance policies will cover any claims against their personal assets or property if they’re named in a suit in connection with board duties. Personal liability doesn’t generally cover board member duties and personal umbrella policies often contain exclusions for board director liabilities.
It’s also important for board directors to be aware that personal insurance and umbrella policies usually exclude insurance protection for issues of wrongful termination and discrimination, which are some of the more common D&O claims.
D&O insurance coverage is affordable for nearly every company. Even small nonprofit organizations can usually afford a basic policy. More nonprofit corporations are getting sued because of the litigious nature of our society. It’s better to have a low limit of liability than no coverage at all.
Final Thoughts on the Importance of D&O Insurance
D&O insurance policies offer board directors the greatest protection against unforeseen claims. Insurance policies are available with a range of liability limits and deductibles. D&O claims can be extremely costly and can seriously impact board directors’ net worth. Insurance agents and attorneys can help organizations find the best D&O insurance policies to meet their needs.
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