Duty of Care: Directors and Officers Insurance

By Dr. Randal Dick | Nonprofit Principal

If board members are playing Family Feud, and the host asks what are the most important things they need to know, you can be sure “Robert’s Rules of Order” would be one of the most common responses. But in the matter of directors and officers (D&O) insurance, the stereotypical board member’s knowledge probably stops at, “Does our board have D&O coverage?”  

I’m writing about D&O because I have been in the terrible situation of needing it and being told we were not covered. This came as a big surprise because we had been paying for D&O for years. It was easy to blame the insurance company, our broker, anybody but ourselves, but the fact of the matter is D&O coverage is conditional. In this article I explain some of the conditions most often overlooked or violated by companies and nonprofit boards:

1. Failure to specify the correct coverage and not reviewing the policy annually
2. Compliance with the policy
3. Unrealistic coverage amounts
4. Ignoring the past

Directors and officers insurance is an omissions policy for the officers and board of a company or nonprofit organization against claims made while serving on the board or as an officer. The basic premise of the D&O insurance policy is to pay for the consequences of actual or alleged “wrongful acts,” including the legal costs of judgments, attorney’s fees and other things the organization becomes liable to pay. 

Are the Right People Covered?

Regardless of what is covered, the policy needs to accurately describe who is insured. How far into the company leadership do you want coverage to extend?  What about executives who are employees? What about any consultants who may be working with leadership or the board? Also, as a director or officer it is important to ask whether the carrier specializes in insuring nonprofit organizations and ensure the language is broad enough for your organization’s structure and risk level. For example, the average nonprofit utilizes volunteers while for-profit companies do not. Wherever the language creates vagueness, there is a basis for misinterpretation. While the policy can be tailored and defined to suit your needs, be sure that everyone who should be covered is specifically named.

Exclusions and Conditions of Coverage

In addition to understanding the exclusions in a policy, board members also need to know and understand the conditions of coverage. Claims can be denied if the organization does not meet the policy conditions. This will be something to ask you broker about. I highlight three areas of concern:

1. Pre-Existing or Pending Claims
   Every application askes multiple times (and asks you to check a box) if there are any pending or existing claims. Misrepresentation will most likely lead to denial of coverage. You might ask your broker to define what constitutes a pending threat. Does the person have to file suit, or just write a demand letter?
2. Exclusions and Endorsements
   This is an area that defines what, if anything, has been set aside and not covered. In addition to prior or pending claims, it includes but is not limited to fraud and intentional noncompliance.
3. General Terms and Conditions
   An insurer can also deny claims in event of failure to comply with the policy’s terms and conditions. The two most common reasons claims are denied under the terms and conditions section are:
   • Misrepresentation on the application
   • Not reporting a potential loss within the timeline defined in the policy
   For example, I was part of an organization that filed a claim only to learn from our insurer that we did not comply with the conditions and therefore would likely not be covered. The problem was that we reported the problem as the suit was being filed instead of at the first knowledge of a bona fide threat. A significant period of time had passed between the original threat and the filing of the suit. It is essential that you contact your broker right away if any written demand is received to see if it starts the clock. 

For the ease of the reader, this post has been split into two parts. Next week, Randal will continue this subject, addressing education, prevention and knowing your limits.

About the Author

Randal is a results-driven, development and execution-oriented leader with more than 25 years of experience leading high performance teams. He’s a proven business professional, capable of leading change in both the boardroom and on the frontline, with a strong track record leading strategy development, entrepreneurship, performance and evaluation globally across a variety of social enterprises and functions.

Prior to joining OneAccord, Randal was the president of Profit Environment, a startup company that brings new solutions to enable CEOs to recapture profit lost due to an unhealthy corporate culture. At Design Group International, Randal was a senior consultant and his focus areas included organizational development, operations improvement, governance excellence and interim leadership.

Click here to learn more about Randal.