As an officer or director at your organization, you encounter a myriad of employment-related exposures.
Sarbanes-Oxley regulatory mandates and increased shareholder activism mean directors are at risk for claims and elevated settlement costs.
The legal cost to defend a director is substantial, as are the potential penalties that can be personally incurred. Due to the personal liability risk—which is not covered under a personal insurance policy—protecting boardroom talent can be a challenge. A directors’ and officers’ liability insurance (D&O) policy is part of a comprehensive risk financing strategy.
D&O Fills the Coverage Gap
Unlike a commercial general liability policy that provides coverage for claims arising from property damage and bodily injury, a D&O policy specifically provides coverage for a “wrongful act,” such as an actual or alleged error, omission, misleading statement, neglect or breach of duty. A D&O policy provides defense costs and indemnity coverage to the entity listed on the policy declarations, which may include the following:
- Coverage for individual directors and officers
- Reimbursement to the organization for a contractual obligation to indemnify directors and officers that serve on the board
- Protection for the organization or entity itself.
Indemnification provisions are typically included in the charter or bylaws of a corporation. While an important risk component, small to midsize privately held companies or nonprofit organizations often do not have the financial resources to fund the indemnity provisions, making the bylaws hollow. A D&O policy can provide an extra blanket of security in the event of a covered loss.
A “fraud” exclusion is typically included in a D&O policy, which eliminates coverage for losses due to dishonest or fraudulent acts or omission, or willful violations of any statute, rule or law.
The following is a list of additional forms of coverage to protect directors and officers:
- Entity coverage
- Payment priority for insured persons
- Severability of the insured as well as severability of the application
- Coverage over time, meaning the coverage responds to past, present and future directors and officers
- Pay on behalf clause
- Duty to defend clause
Additionally, some D&O polices can be endorsed to provide employment practices liability (EPL) coverage and/or fiduciary liability:
- While EPL endorsements under a D&O policy broaden coverage, they often do not provide a duty to defend clause and are subject to a substantial deductible. Many EPL endorsements do not provide for a separate limit of liability in addition to the limit available under the D&O policy. If the D&O limit is reduced or exhausted by payment of an employment practices claim involving the wrongful conduct of an employee, a director’s or officer’s personal assets may be at risk.
- Fiduciary liability provides coverage for liabilities arising out of the Employee Retirement Income Security Act (ERISA), where fiduciaries can be held personally liable for losses to a benefit plan incurred as a result of alleged errors, omissions, or breach of their fiduciary duties.
Considerations for Non-profits
According to the Nonprofit Risk Management Center, nonprofit organizations often report some difficulty in affording D&O insurance. To minimize the annual premium, they recommend choosing only those policy provisions considered most critical. If affording a lump sum premium is a concern, inquire about the availability of premium financing. To defray the cost of premiums, some nonprofit organizations consider charging board members a portion of the policy cost.
We’re Here to Help
Whether you’re a nonprofit, privately held or public company, both you and your business can benefit from a D&O policy. Since there is no such thing as a “standard” policy, a professional agent is invaluable when purchasing D&O coverage.
Call us today at 708-845-3000 to learn more about the appropriate protection for you and your company.
