MHLS - Trustee Resources

Director's and Officer's Insurance

Key Policy Features | Components of a Liability Insurance Policy
Examples of D&O Liability Claims Against Nonprofit Organizations | Availability

Key Policy Features

Entity Coverage
Entity coverage on a D&O policy covers an insured organization in addition to its directors and officers. This is a very important feature to look for because if you do not have coverage for the entity and the organization is named in a lawsuit then there is no coverage for the organization itself. The organization must hire its own attorney and pay any claims levied against it.

Duty to Defend
This term binds the insuring company to defend you in any claim covered under the policy. It means that the company must hire, manage, and pay for any legal counsel used in defending you in a suit. This can be beneficial because it saves the organization the time to hire an attorney specialized in the area of the claim and coordinating a legal plan.

Broad Definition of Insured
D&O Insurance, in its purest form, only extends coverage to the organization's directors and officers. With a broader definition of insured, you can allow coverage for staff, committee members, and volunteers.

Defense Cost Outside Policy Limits
In most cases the largest cost of a claim is the cost to hire attorneys to defend you in a suit. If your defense costs are outside policy limits, then ay expenses incurred to defend you are paid for in addition to the limits stated on your policy. If you have defense cost inside policy limits and you have a claim, the cost of defense will reduce the amount of your policy limits. For example, you have a $1MM-limit policy with defense cost inside policy limits and you have a claim of $600,000 and a defense cost of $500,000.Your policy will only pay $1MM and you are responsible for the additional $100,000 (since the claim and defense cost exceeded your $1MM limit).

Prior Acts Coverage
Prior acts coverage extends coverage to the organization for claims that occurred before the inception of the policy. This is afforded only if the insured was unaware of the claim at the time of policy inception. This coverage is important because although a claim may have happened the insured may not become aware of it until several months later.

Extended Reporting Period
This term comes into play when an agency cancels its coverage or possibly goes out of business. For a percentage of the premium, the insured can purchase the right to submit claims for a stated amount of time after the policy has been canceled. This is very important to any agency that ceases to exist. Even though the board and staff have stopped making decisions with respect to running the organization, there could still be some exposure to a claim base upon a previous decision that was made when the organization was in operation.

Components of a Liability Insurance Policy: "DICE"

Declarations Page
The Declarations Page of an insurance policy is the cover sheet of the policy that lists the name of the insurance company and the insured that is taking out the policy. It also lists the type of policy, the policy limits of liability, along with any deductibles, and the premium charged for the coverage. The Declarations Page is a broad overview of the policy.

Insuring Agreements
The Insuring Agreements state whom the insurance company considers to be insured under the policy.

Conditions
The Conditions portion of a policy state the conditions under which the insurance company will defend, and/or pay on behalf of, a claim submitted by an insured.

Exclusions
The Exclusions section will list all the circumstances in which coverage is not afforded by the policy. Some exclusions are standard on most contracts, while others are specific to the insured. Make sure you are aware of what coverage is excluded under your policy.

Please Note:
Occasionally endorsements are added to a policy to either add coverage features or to increase or change existing coverage under the policy. In certain cases coverage is excluded on the policy under the exclusions section and then endorsed onto the policy to allow for coverage in the endorsements. It is always a good idea to read your policy thoroughly before determining whether or not you are covered.

Blind-Sided! Examples of D&O Liability Claims Against Nonprofit Organizations

It may only take one lawsuit to close the doors of a nonprofit organization. Operating within strict financial guidelines, nonprofit organizations often don't have the resources available to defend a claim. Legal costs alone could financially cripple an organization. With D&O liability insurance in place, a nonprofit organization can concentrate on its mission. Consider the following examples:

Sex Discrimination
A female employee who had been working for a nonprofit organization for two years discovered that a male employee with no experience has just been hired to work in a similar position at a higher salary than hers. After a year, the male employee was promoted to a position over the female employee. The female employee confronted her supervisor about the situation and the supervisor declined to offer an explanation. The female employee brought a sex discrimination suit against the nonprofit organization claming she was next in line for a promotion based on seniority. As a result the nonprofit settled out of court and defense expenses incurred exceeded $70,000.

Misappropriation of Funds
A donor made a large contribution to a nonprofit. The funds were to be used primarily to aid impoverished children with education and health care needs. Instead, the nonprofit needed to expand the building, and committed a portion of the donation to the building fund. The donor then filed suit against the nonprofit itself, alleging misappropriation of funds. The damages included return of the full contribution plus interest. As some of the money was already spent, the nonprofit would be financially unable to return the entire donation.

Age Discrimination
A nonprofit organization advertised an open position for a bus driver. This individual would transport community members, who did not have a vehicle, to and from appointments and errands. The organization received seven applications. Of the seven applications, one man was not chosen to be interviewed. This applicant alleged he was not interviewed because of his age, and he filed suit against the nonprofit organization for age discrimination. The nonprofit organization denied any wrongdoing but settled the case for $15,000 to avoid full litigation costs.

Sexual Harassment
An employee of a nonprofit organization was out of work for six months on disability leave for back surgery. This employee was guaranteed her position when she returned. Upon her return, she refused to go back to her previous position, claiming she had been sexually harassed by her immediate supervisor, which created a hostile working environment. According to the nonprofit organization, no formal complaint of sexual harassment was ever filed and the employee resigned of her volition when no other position was offered to her. However, the employee sued the organization for lost wages and emotional distress. A jury decided the case and although the organization was found not guilty of the charges, defense expenses incurred by the nonprofit organization reached $70,000.

Information adapted from The Council of Community Services, Inc. 2000

Availability

Insurance available from Council Service Plus