Now that I have (hopefully not) scared you away from serving on a nonprofit board --- and instead given you guidance to help you be more prepared for your roles and responsibilities – I am now going to review the protections from liability that exist for nonprofit board members.
A Basic Primer to Directors and Officers Insurance
As a general rule, homeowners and umbrella-type liability insurance owned by a nonprofit officer or director does not protect that individual from liability in their capacity as an officer or director. So – it is always good to ask whether an organization carries D&O insurance (and what it covers), and if not, why not? The following is a very basic primer to D&O insurance – anyone considering purchasing such insurance or in the process of evaluating the policy should read the policy well, and seek additional information if they do not feel they fully understand the policy.
What is it?
There are two aspects to D&O insurance – the duty to defend and the duty to indemnify. The duty to defend should involve both the duty to cover the costs of the defense, and the duty to mount the defense. The duty to indemnify covers situations in which reimbursement is due for losses that resulted as the result of an claim allowable under the policy.
There are three types of D&O Insurance:
- Insuring Agreement A coverage (A-Side coverage) – The insurer will pay defense costs and liability for board members that are sued and are not able to be indemnified by the organization either because indemnification is not available or the organization is insolvent.
- Insuring Agreement B coverage (B-Side coverage) – The insurer will reimburse the organization for amounts paid to directors and officers to satisfy indemnification claims brought under corporate law or the organization’s governing documents.
- Insuring Agreement C coverage (C-Side coverage) – The insurer will insure the organization against its own wrongful acts.
Organizations can obtain different levels of coverage, or even excess coverage.
Policies can also differ as to the time frame that is relevant for the claims – they will either be a “claims made” or “occurrences” policy.
Under a claims made policy, the insurer should cover claims made during the period the organization was covered by the policy. This sounds simple, but the insurance company will look to see if the events that led to the claim happened prior to coverage – and often will set a specific date as a cutoff point to determine if the events that caused the claim are within the covered period. When a policy is renewed, it should contain a provision that covers acts prior to the current policy year (back to that cut-off date). Once insurance is canceled, organizations often have the opportunity to purchase “tail coverage” that covers any claims that resulted from events that would have been covered, but the claim is not made under the tail period.
Occurrences policies cover claims made as a result of events that occurred during the policy period, no matter when that claim is made. Thus, unless special “prior acts” coverage is obtained, if a claim is made during the policy period that arose from events that occurred prior to coverage, the policy will not cover the claim.
You have insurance – you are completely safe, right?
As is the case with any kind of insurance, high policy limits can be expensive. Defense costs to a claim can easily eat up lower policy limits.
Most policies require the insurer to be promptly notified of claims. Even if the insurer is not prejudiced by late notice, policies might provide that coverage can be denied for that reason only.
- Knowledge – before the agreement to insure was entered into, organization (through its officers and directors) had knowledge of certain facts that could reasonably result in a claim. It is important to read the specific language in the policy to understand exactly how the insurer applies it.
- Officer or director was acting for personal profit
- Fraud, dishonesty, criminal or intentional misconduct by an officer or director
A Few Things to Think About When Looking at D&O Insurance
- Think about how much coverage you need (for example, if you have 6 board members and all get sued – a lower limit might not cover the costs to defend all of those people)
- Does the organization have employees? Employment claims are some of the most common claims brought against nonprofit boards and officers – make sure the policy is going to cover employment practices
- Analyze other protections out there for you as a volunteer board member, and whether those are sufficient
Read the policy. Read the Policy. Ask Questions. Read the Policy.