Directors and Officers Insurance

Think of directors & officers liability insurance as a specialized form of professional liability coverage designed specifically for the corporate leadership of an organization. Like anyone, directors and officers can make mistakes of judgment. However, when they make mistakes based on alleged negligence, recklessness, or bad faith, they may be held personally liable for their acts or omissions. These situations frequently revolve around allegations regarding what an organization should have established regarding institutional controls, financial management, or regulatory compliance.

Protecting Your Board and Their Assets

In many organizations, leadership positions are occupied by volunteers. Asking individuals to accept personal financial responsibility for corporate decisions would likely force them to resign in order to protect their personal assets. Organizations that recruit and sign leaders to long-term commitments normally facilitate board member insurance to assume the risk for these voluntary positions.

Please note: If boards are directed by paid individuals (meaning those who receive any consideration or remuneration whatsoever) this can restrict or change coverage requirements. Do not assume your standard policy covers paid and unpaid members equally. Talk to one of our agents to ensure that the organization is receiving the exact protection it requires. While self-insurance is technically an option if all parties are fully aware of the situations and willing to live with the risk, it is highly unusual and incredibly risky. This is especially true when securing nonprofit directors and officers insurance, where shielding the personal assets of volunteer board members is critical for recruitment and retention.

Understanding the Policy Structure

Standard directors and officers insurance policies, sometimes referred to as “portfolio policies,” typically consist of two primary parts:

• – Part A: Facilitates direct reimbursement for third-party claims brought directly against the directors and officers when the corporation cannot or will not indemnify them.
• – Part B: Reimburses the corporation if it is required to indemnify its directors or officers according to state law, its corporate charter, or its bylaws.

It is crucial to understand that directors & officers liability insurance policies are typically written on a “claims-made” basis. This means they only facilitate coverage while the policy is actively in effect, unless otherwise modified (such as including a retroactive date for claims occurring before the policy’s inception date).

The Risks of Portfolio Policies

A primary challenge with portfolio policies is that they “share” a coverage limit across various line items. For example, an organization transfers an amount of coverage (usually $300,000, $500,000, or $1,000,000) to the insurance carrier. However, if multiple line items of coverage are attacked simultaneously in a complex civil lawsuit, those shared limits of insurance may prove completely inadequate.

Another major point of concern involves how defense costs are handled. In many standard policies, defense limits are strictly inside the limit of coverage (often called a “shrinking limits” policy). This means that if a $500,000 suit is brought against the board of directors, and $200,000 is consumed by defense counsel, expert witnesses, and court fees, there would be only $300,000 of the limit left to pay a settlement or judgment if the insured organization is found negligent. This structure is very risky and unnecessary.

Strategic Options and Cost Mitigation in Directors & Officers Liability Insurance

There are available options that include completely separate coverage items to transfer more risk to the insurance company. For instance, securing defense coverage outside the limits of insurance can be facilitated. Although this broader protection would be expected to cost a higher premium, it guarantees that your legal defense does not deplete the funds available to pay out a claim.

Additionally, deductible options can help mitigate the higher premiums associated with better protection. D&O claims do not occur often, but when they do, they can be financially devastating. Increasing a deductible to $5,000, $10,000, or even $25,000 could be a solid financial decision. Many organizations can handle paying a higher deductible in the rare event of a suit, whereas not having adequate overall limits of insurance could result in institutional bankruptcy.

Plan a conversation with one of our experienced agents today to review your current organizational structure and see what your directors & officers liability insurance options could be.