Nonprofit clients often ask us whether they really need to purchase Directors and Officers Liability Insurance (“D&O Insurance”). Our answer is always an emphatic YES! D&O Insurance is an important safeguard for any nonprofit organization. D&O Insurance protects the directors, officers, and often even the employees and volunteers from personal liability that arises in connection with the organization’s activities. Even if the organization can’t anticipate any liability based on the nature of its activities, it should still obtain D&O coverage because the point of insurance is to cover the unexpected. In fact, many sophisticated business people will not serve on a nonprofit Board unless D&O Insurance coverage is in place.
However, choosing the right carrier and policy may not be as straightforward as it seems. Unlike general liability insurance where there is standard policy language, each insurance company writes its own specialized D&O Insurance policy. Generally, there are two types of policy options:
1. Claims-made policies which pay based on the date of the lawsuit; and
2. Occurrence policies which pay based on the date of the accident or occurrence.
Regardless of the type of policy, it is important for a nonprofit to closely review each policy option to pick the one that is the best fit for the organization. A few of the most desirable provisions of coverage for nonprofits include:
- Broad Definition of Insured. For example, a broad definition of the insured might include “any natural person who was, is or becomes a director, trustee, officer, employee, committee member, or volunteer” as well as the nonprofit organization itself.
- Requirement to Advance Defense Costs. D&O Insurance cases are often expensive and lengthy therefore nonprofits should look for language that requires the insurer to advance the defense costs. The alternative is language requiring the insurer to reimburse the insured for the costs of defense at the end of the litigation which can severely stretch a nonprofit’s resources.
- Broad Definition of Claim. A “Claim” should be defined to include not just lawsuits but also investigations, administrative proceedings and arbitrations. This coverage is not always available, but it is worth looking for since IRS, FTC, EEOC or similar investigations and proceedings can be costly.
- Attorney Selection. The insurance company should not have complete discretion to select the attorney who will defend the organization. The organization should have a significant voice in that decision.
- Indemnification Costs. When an organization agrees to indemnify its directors in connection with litigation, that indemnification obligation must be funded by insurance; otherwise, it comes out of the organization’s own funds
- Severability. If a policy has no severability clause, courts have held that a misrepresentation made by one insured will be imputed to all and that the policy may be voided as to all.
- Insured vs. Insured Exclusion. This exclusion denies coverage if one insured, such as a director, sues another insured, such as the organization. This should not apply to employment claims because these by definition involve a suit against the organization. Cross claims should also be excepted; otherwise, the indemnification coverage could be destroyed for such claims.
- Broad Coverage For Employment Practices Liability. In addition to contract causes of action, such as wrongful termination, nonprofit D&O Insurance policies should also address the exposures for employment-based discrimination and harassment. However, not all D&O policies cover these allegations. Those that do, accomplish this either by covering all employment-related suits or by listing specific exposures. If the policy includes a specific list, the reader must determine if all exposures are included. There should be coverage for cases arising under both state and federal laws; those specific to employment and those, such as the Americans with Disabilities Act (ADA), that are applicable in many contexts. Of equal importance, and not so easily determined, is an insurer’s interpretation of certain definitions. For example, if the insurer defines sexual harassment as sexual abuse, there may be no coverage under that D&O Insurance policy if it contains a sexual abuse exclusion.
- “Prior Acts” Coverage/Extended Reporting Period Endorsement. Under a claims-made policy, there is usually a cut-off date, and any claims arising prior to that date are not covered, thereby creating a potential gap in coverage. “Prior acts” coverage can fill this gap, as can an extended reporting period endorsement.
To secure the best available and financially feasible D&O Insurance coverage for your organization, it is important to work with a broker who understands the insurance needs of nonprofits. An experienced broker will be able to navigate these and other questions to ensure the right coverage is obtained for the organization.