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Board of Directors and Officers celebrating because they have a insurance policy - Blue Lion Insurance Advisors

Avoiding corporate scandals has forced privately held companies and non-profit corporations to reassess their insurance policies to limit their liabilities arising from management decisions of their board of directors. This is where a good directors and officers insurance policy becomes invaluable.

 

Statistics show that employees and shareholders are the likeliest groups to lodge D&O lawsuits against private companies. If you’ve been assessing your D&O risk, then continue reading to learn more about D&O insurance and how it can help protect your business.

 

As an officer or director at your organization, you may encounter a plethora of employment-related exposures. Sarbanes-Oxley regulatory mandates increased shareholder activism, which means that directors are at risk for claims and increased settlement costs.

 

The legal cost to defend a director is substantial, as are the potential personal penalties that can be incurred. Due to personal risk—not covered under a personal insurance policy—protecting boardroom talent can be challenging. 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, which may include the following:

  • Coverage for individual directors and officers
  • Reimbursement to the organization for a contractual obligation to indemnify directors and officers that serve on the board
  • Protection for the organization or entity itself.

 

Indemnification provisions are typically included in the charter or 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 Directors and Officers insurance 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.

The following is a list of additional forms of coverage to protect directors and officers:

  • Entity coverage
  • Payment priority for insured persons
  • Severability of the insured as well as severability of the application
  • Coverage over time, meaning the coverage responds to past, present and future directors and officers
  • Pay on behalf clause
  • Duty to defend clause

Additionally, some Directors and Officers insurance policies can be endorsed to provide employment practices liability (EPL) coverage and/or trustee 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 assets may be at risk.
  • Fiduciary liability provides coverage for liabilities arising out of the Employee Retirement Income Security Act (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 D&O insurance. To minimize the annual premium, they recommend choosing only those policy provisions considered most 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 board members a portion of the policy cost.

 

We’re Here to Help

Whether you’re a nonprofit, privately held or public company, both you and your business can benefit from a D&O policy. Since there is no such thing as a “standard” policy, a professional agent is invaluable when purchasing D&O coverage.

Call us today at 732-649-1600 to learn more about the appropriate protection for you and your company against potential directors’ and officers’ liability.