DON’T NEGLECT A D&O POLICY!
As an officer or director at your organization, you encounter a myriad of employment-related exposures. New Sarbanes-Oxley regulatory mandates and increased shareholder activism mean directors are more frequently at risk, translating to rising claims and escalating 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:
Indemnification provisions are typically included in the charter/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.
“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 adequately protect directors and officers, including:
In addition, some D&O polices can be endorsed to provide employment practices liability (EPL) coverage and/or fiduciary liability.
Considerations for Nonprofits
According to the Nonprofit Risk Management Center, nonprofit organizations often report some difficulty in affording the cost of 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.