Insurance Coverage - Directors & Officers
Insurance
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Why is directors & officers insurance so
important?
Even the most stringent risk management policies and procedures do not necessarily provide for adequate protection against liability in legal actions. Various laws grant limited immunity to board members during service. Transferring part of the risk by purchasing insurance is a commendable precaution. But how does each organization determine what measures are enough to meet its needs?
Listed below are some common questions posed by board members concerning liability insurance and appropriate coverage for their nonprofit organizations.
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Protection
for the
decisions
& practices
of your
dog club
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Q: Our board is very focused on responsible governance. Doesn't our pro-active attitude protect us?
A: No insurance is worth much unless proper precautions are in place to begin with. However, it is impossible to anticipate every possible conflict situation. And it is wise to remember that lawsuits can be filed even against the most law-abiding citizens. The cost of defending even the most ridiculous lawsuits can be expensive.
Q: Doesn't our indemnification policy guarantee that all of my expenses will be taken care of if I get sued?
A: Indemnification means that the organization will rely on its own resources to pay board members' legal costs for claims that result from board service. However, the indemnification policy goes only as far as the organization's resources allow it. If there is no money to pay, there is not adequate protection. Today's legal costs can rise to quite astounding figures and the risk of losing most of the organization's assets is not very comforting. Many state permit indemnification only as provided in the organization's bylaws.
Q: How much can I rely on the federal and state laws?
A: State laws do not fully protect the individual's nor the organization's assets. Some states laws normally exclude staff and direct-service volunteers and cover only board members. Other state laws only provide protection if the nonprofit has liability insurance applicable to the claim. Also, very little protection can be found from employment-related acts, such as harassment or discrimination, the most often cited basis for lawsuits that name board members and executives.
Q: How does the new Volunteer Protection Act cover me?
A: The Volunteer Protection Act of 1997 was designed to enhance immunity from personal liability in an effort to encourage volunteerism. The Act takes effect when volunteers are acting within the scope of their organizational duties; they are properly licensed; the harm is not caused by willful or criminal misconduct nor gross negligence; and when operation of vehicles is not involved. It is important to note that the Act does not protect the organization itself, which still may be held liable for the acts of its volunteers. Neither does the Act protect a volunteer from being named as a defendant in a lawsuit.
Q: Isn't general liability insurance enough?
A: General liability policies cover negligent acts that result in property damage or bodily injury. Harm resulting from executive decision making is not automatically covered.
Q: Why should my organization obtain D & O insurance?
A: For the most part, D & O insurance does not overlap with your general policy; it is an extension. One important additional benefit concerns employment related claims. A good D & O policy should also provide coverage for employment practices liabilities, such as allegations of intentional acts. Also, this policy typically reimburses the organization for any indemnification expenses it may have suffered and it provides direct payments to those insured when the organization is not reimbursing them. The policy generally covers legal fees regardless whether the lawsuit is frivolous. Without this protection the organization may not be able to afford to defend itself and the board members.
Q: How can we get the best policy for us?
A: Negotiate. Do not take a standard policy. Each organization has specific requirements that need to be spelled out in the document.
»» Pay attention not only to what is included but also what is not mentioned or is excluded in the policy. Some policies may not automatically include volunteers.
»» Make sure all those you want to be covered are listed in the policy.
»» Check the definition of a covered loss. Are attorneys' feed included as well as fines, penalties, or punitive damages? Some states do not allow insured to cover punitive damages. Most states do not allow coverage of civil fines, especially ones form the IRS.
»»Clarify whether defense costs are paid as they are incurred or on a reimbursement basis.
»»Discuss the necessity to extend the coverage over past acts; most policies are claims-made and reported (responsibility over claims made and reported in the same year when the acts took place and while coverage was in place.)
»»Calculate the needed policy limits and assess your deductibles.
»»Deal with an insurer or broker who understands nonprofits.
Q: How can we purchase D & O insurance?
A: Click Here To Request
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