DON’T NEGLECT A D&O POLICY!
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,whichmay 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 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.
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 adequately protect directors and officers, including:
- entity coverage;
- payment priority for insured persons;
- severability of the insured aswell 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 assetsmay be at risk.
- Fiduciary liability provides coverage for liabilities arising out of 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 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 consideredmost 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 boardmembers a portion of the policy cost.
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 nonprofits, are not exempt from litigation arising out of the management decisions of their boards. They, too, are at risk.
According to St. Paul Travelers, statistics show that shareholders and employees are the most likely groups to sue private companies. Other parties bringing suits may include corporations against themselves, and a variety of third parties, such as competitors, creditors, regulatory bodies, etc.
WE’RE HERE TO HELP
Since there is no such thing as a “standard” policy, a professional agent is invaluable when purchasing D&O coverage. Call Momentous today to learn more about the appropriate protection against potential directors’ and officers’ liability.
Disclaimer: The above content is a general overview which is provided for discussion purposes only and is not in any way meant as providing recommendations or legal counsel. It is not intended to apply to each circumstance. Because the facts and circumstances of every matter differ and the terms, conditions, exclusions and limitations contained in insurance policies vary, you should review your policy carefully and seek any legal counsel that may be necessary or appropriate. Momentous is not responsible for any losses or damage resulting from reliance on the information contained herein.