In the wake of unprecedented corporate scandals in recent years, clearly the trend of corporate accountability applies to large corporations. But privately held companies, including non-profits, are not exempt from litigation arising out of the management decisions of their boards. They, too, are at risk.
As an officer or director at your organization, you encounter a myriad of employment-related exposures. Directors are increasingly 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 defence costs and indemnity coverage to the entity listed on the policy declarations, which may include:
- Coverage for individual directors and officers
- Reimbursement to the organization for a contractual obligation to indemnify directors and officers that serve on the board; and
- Protection for the organization or entity itself.
Indemnification provisions are typically included in the bylaws of a corporation. While an important risk component, small to mid-size privately held companies or non-profit 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.
There are additional forms of coverage to protect directors and officers, including:
- Entity coverage;
- Payment priority for insured persons;
- Severability of the insured as well as severability of the application;
- Coverage over time, meaning coverage responds to past, present and future directors and officers;
- Pay on behalf clause; and
- Duty to defend clause.
In addition, 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.
Considerations for Non-profits
Non-profit 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 non-profit, 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.
Contact The Hull Group today to learn more about the appropriate protection for you and your company against potential directors’ and officers’ liability.