Why do you need D&O coverage?
You need Directors & Officers Insurance because claims from contributors, employees, and clients will be made against the company, AND against the directors of the company. Since a director can be held personally responsible for acts of the company, most directors and officers will demand to be protected rather than put their personal assets at stake.
Non Profit Directors and Officers are legally responsible for the day-to-day decision-making of their organization. These board members can be held personally liable for any breach of duty. There are also three specific duties: The duty of CARE, The duty of LOYALTY and The duty of OBEDIENCE.
- Duty of Care – requires Directors and Officers to act prudently and reasonably in regard to the management of the organization’s affairs
- Duty of Loyalty – prohibits Directors and Officers from using their position in the organization to further their own personal interest
- Duty of Obedience – requires Directors and Officers to ensure that the organization is run in accordance with it’s charter and bylaws, and that the organization complies with applicable laws
Directors and Officers Liability Insurance provides financial protection for the directors and officers of the organization in the event they are sued in conjunction with the performance of their duties as they relate to the company – The Duty of Care.
Most claims are injury related and full into general liability.
Claims generally fall into two areas: injury (bodily or property) and non-bodily injury (non-physical harm, like discrimination or termination). Most claims are injury related and full into general liability. There are two types of lawsuits involving claims against board members: derivative lawsuits and direct or third-party lawsuits.
Derivative suits are claims against a board member on behalf of the corporation. The typical claim would be mismanagement of assets. Note the purpose of these claims is not for individual profit, but to make the corporation “whole”.
Direct or third-party suits are brought by an individual who asserts a claim against the corporation or its board due to some non-bodily injury. Some of these claims fall under employment practices involving termination and discrimination. This coverage is recommended wherever employees or employment contracts are made and is available at a minimal cost.
D & O coverage is usually a single limit for each occurrence and aggregate and is written on a claims-made policy form. The importance here is understanding that coverage is triggered on the date you first became aware of a claim or potential claim. The key here is to follow precise procedures for all claims, since coverage is triggered by your awareness of even a potential claim.
When in doubt you should always call us for a review.
This notification makes prior acts coverage very important as claims usually occur prior to the current policy but are unknown until several years later. We will be happy to help you review your D&O insurance needs – call us at 214-265-1221.