Directors and Officers Insurance

Think of it as professional liability insurance for directors and officers of a corporation. Like anyone, directors and officers can make mistakes of judgment, but when they make mistakes based on negligence, recklessness, or bad faith, they may be held liable for their acts or omissions. These situations tend to be based around what an organization should have had around institutional controls.

These positions are usually occupied by volunteers, so asking them to accept personal responsibility would likely force them to resign in order to protect their personal assets. Organizations that recruit and sign directors to long-term intentions normally facilitate coverage to assume the risk of those persons for the voluntary positions. Please note: If boards are directed by paid people, those that receive any consideration or remuneration whatsoever, can restrict or change coverage, and can sometimes be inappropriate. Don’t assume! Talk to one of our agents to ensure that the organization is receiving the protection that it believes it is. Self-insurance is acceptable if all parties are fully aware of the situations and are willing to live with that risk, but this is very unusual.

Directors & officers policies can have two parts in what is called “portfolio policies”. Part A facilitates direct reimbursement for third-party claims brought against directors and officers. Part B reimburses the corporation if it is required to indemnify directors or officers according to state law, its corporate charter, or by-laws. These policies are claims-made, meaning they only facilitate coverage while they are in effect, unless otherwise modified, as when they include a retroactive date for claims occurring before the inception date. A primary challenge with portfolio policies is that they “share” a coverage limit. So the client transfers an amount of coverage, in a dollar amount such as $300,000, $500,000, or $1,000,000 to the insurance carrier, however if multiple line items of coverage are attacked in a civil lawsuit, the limits of insurance may be inadequate. Another major point involving warnings about portfolio policies is that defense limits are most always inside the limit of coverage. Meaning that if a $500,000 suit was brought against the board of directors, and $200,000 were consumed by defense counsel, agent witnesses, etc. then there would be only $300,000 of limit left to pay, if the organization that is insured were to be found negligent in the litigation. This is very risky! And unnecessary.

There are available options that include completely separate coverage items, to transfer more risk to the insurance company. Defense coverage outside the limits of insurance can be facilitated, although it would be expected to cost a higher premium. Additionally, deductible options can help mitigate higher premiums due to the desire for better protection. Claims don’t occur often, however they can be devastating. So perhaps increasing a deductible to $5k, $10k, or even $25k could be a solid decision, as many organizations could handle paying a higher deductible in rare cases of suit, however not having adequate limits of insurance could be devastating.

Again: Plan a conversation with one of our agents to see what your options could be.