This is the continuation of a discussion on directors and officers (D&O) insurance which Dr. Randal Dick started last week. If you missed part one, you can find it here.
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 your broker about.
Education Is the Best Defense
This is a good spot to thank our broker, Mike Arnold of The Partners Group. The Partners Group is a great company and Mike goes out of his way to serve as a trusted advisor to OneAccord.
Mike believes board member education is the best form of problem prevention and suggests that a board invite their broker to come talk with them. Don’t just delegate the task of getting D&O to the treasurer and then forget about it.
I like Mike’s observation: “Brokers are there to serve their clients.” If you never see or hear from your broker, maybe you could use a new one. In the event of need, a board will really appreciate a professional who has their back more than an invisible insurance salesperson.
Know Your Limits – Is Coverage Really Adequate?
Let’s say a typical small to medium nonprofit carries $1 million in liability coverage. In most policies, the cost of legal defense is part of the general coverage. If the limit of liability is a million dollars and the defense costs $250,000, that leaves only $750,000. If there are six board members and all are named in an action, is there enough to pay the claim? If not, the remainder must come from the organization’s assets or the personal assets of the board members. Every person on the board has personal risk. I suggest that the entire group discuss the issue and come to an intelligent decision regarding how much coverage to carry. It’s too complicated to go into here, but ask about retention levels (how much the organization is willing to pay before coverage begins). Higher levels reduce premiums.
Different companies and organizations operate in very different risk environments. Your broker should help you define the risk level and understand how to get adequate protection at the best price. Your broker should also explain the layers of coverage, the difference between Side A, Side B and Side C, and be able to combine these layers of coverage in a way that best suits.
Cover Your Tail
What if the board you resigned from five years ago gets sued? Guess what: If the alleged wrongdoing occurred when you were a board member, you are on the hook. Many of us are serial board members and may serve on multiple boards simultaneously. Over a 10- or 20-year stretch, you may have liability potential in a dozen or more companies or organizations. Very few volunteer board members give D&O a thought once they are no longer involved. Many D&O policies will extend coverage for past board members, however, it is in your interest to find out.
If you are on a board that is cancelling its D&O policy, you need to purchase tail coverage. Tail coverage (that’s an industry term, not me trying to be funny) is the insurance that protects past service in this situation. Tail coverage costs tend to decline over time and it may even be possible to just purchase a set amount of coverage for a negotiated premium. If you are transferring from one carrier to another, make sure the new carrier backdates coverage to the date of the original policy to make sure any claims that may arise are covered. There is a time issue here, as little as 30 to 60 days, so to be sure you don’t lose the ability to cover the past. Better yet, have the discussion with your broker and work out the issue before you cancel your original policy.
Final ThoughtThe best way to protect yourself against liability gaps is to carry a blanket personal liability policy that would cover you personally in the event of an alleged wrongful act or omission that the organization couldn’t or wouldn’t cover. I’m getting my broker on the phone!
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.