Serving on a Board? What You Need to Know About D&O Insurance Coverage

You’ve been asked to serve on a board of directors. Or maybe you’ve been serving on a board for years. You are passionate about helping the organization accomplish its mission, but what do you really know about how protected you are in your role? For too many people, the answer is, “Not much.”

Many of us jump into a board role with enthusiasm. In that excitement, it can be easy to overlook the liability risks that come with serving on a board. Those risks are very real. Thankfully, there are ways to limit your liability.

Whether you serve on a nonprofit or corporate board, directors and officers (D&O) liability insurance can provide the foundation of the protection you need. Recently, I connected with John Orr, D&O Liability Coverage Leader at Willis Towers Watson, a leading global advisory, brokerage, and solutions company, to explore D&O insurance, how it works, and why it is important.

Bill: Why does someone need D&O insurance?

John:  Essentially anyone serving on a board needs to be covered by D&O liability insurance. There is no shortage of liability exposure for board members, including lawsuits made by investors, employees, regulators, vendors, and others. Examples of allegations that can trigger a D&O policy include breaches of legal duties, anti-competitive behavior, and violations of state and federal laws. An organization itself is usually covered for its own liability, but D&O insurance is needed to cover you personally in your role as a board member.

Bill: Do you need D&O insurance if you serve on a nonprofit board?

John: Absolutely. Just as with for-profit organizations, directors and officers of nonprofits have exposure to liability claims. Those claims can include allegations of financial mismanagement, mishandling of gifts and donations, poor servicing of beneficiaries, and more. Claims against nonprofit boards can be made by regulators, donors, and beneficiaries, among others. Again, D&O insurance is important for anyone serving on a nonprofit board.

Bill: What are some of the pitfalls in the types of D&O insurance coverage offered? Is cost of defense covered?

John:  Typically, D&O policies cover losses resulting from claims, such as settlements, judgments … and yes … the cost of defending claims. However, D&O policies are limited in scope and will include exclusions and coverage restrictions. For example, there are typically exclusions for claims brought by directors and officers against other directors and officers, claims resulting in findings of fraud, as well as fines, penalties, taxes, or losses that are legally uninsurable. In addition, D&O policies vary in how the defense of claims are handled. Most policies require the insurance company, not the policyholder, be responsible for hiring attorneys to defend claims.

Bill: What type of coverage should you have, if any, when you leave a board?

John: The good news is that most D&O policies insure not only current directors and officers, but also former directors and officers. That assumes that claims against former officials are for acts committed during their time of service on a board. As long as the organization continues to purchase D&O insurance with similar coverage, former officials are protected even after they leave the board.

Bill: Do you need D&O coverage if you serve on the board of a closely held company?

John: The short answer is yes. Even though they have a smaller base of investors/shareholders, directors and officers of closely held corporations do indeed face liability exposure. Claims may be made by employees, vendors, competitors, regulators, and others based on allegations of mismanagement, wrongful termination, misrepresentation, regulatory issues, among other types of claims.

Bill: Beyond D&O coverage, are there other types of insurance or protections one should consider?

John: While D&O policies can be well worth it, they generally do not cover every form of liability that a director or officer may encounter. For example, D&O policies typically exclude coverage for liability in overseeing employee benefit plans. Some D&O policies may also exclude liability resulting from employee claims like wrongful termination and retaliation.

Because of those coverage limitations, it can be wise to purchase additional policies, such as a fiduciary liability policy or an employment practices liability policy. It is important to note that personal insurance generally does not cover for-profit board service. However, in some instances, limited coverage through personal insurance may be available for nonprofit board service.

DISCLAIMER: We provide this overview for informational purposes only. Whether coverage would apply in any given matter would depend on the specifics of the allegations asserted, the application of policy terms (not limited to those addressed in here), and applicable law. Finally, while we can provide an assessment of the potential application of policy terms and conditions, we cannot, as brokers, provide legal advice. We urge you to seek the advice of qualified counsel on legal issues associated with liability and coverage.
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