Why Directors and Officers Insurance
D&O liability insurance is a critical form of financial protection that can safeguard nonprofits big and small from the substantial financial fallout that even a single lawsuit could bring.
Similar to individuals serving on the board of private companies, directors and officers working in a non-profit environment should consider the organization’s risk and implement risk management strategies to minimize litigation exposures. Part of this process includes finding the right Directors and Officers (D&O) insurance policy to fit the needs of your organization.
Gross & Company Insurance serves the diverse companies and organizations across the U.S. with policies that are focused on our clients’ needs rather than the bottom line.
Do You Need Directors & Officers (D&O) Liability Insurance?
Directors and officers (D&O) insurance protects decision-making executives and personnel in the event they are personally sued by investors, employees, vendors, volunteers, and other such parties. Directors and officers can be sued for any number of reasons, even those who serve a non-profit.
To protect yourself and other board members from personal loss resulting from litigation invest in directors and officers liability insurance coverage.
IMPORTANCE OF D&O INSURANCE
The goal of many nonprofits is to aid the demographics that they serve. The various objectives of these nonprofits attract individuals with likeminded passions, and in some cases, these people eventually become board members. Though board members may have the wellbeing of their respective nonprofits at heart, any number of circumstances can lead to legal action that threatens both their financial security and that of their respective nonprofits.
Organizations of Any Size Can Be Sued
It doesn’t matter how small your non-profit is, organizations of any size can be sued for wrongdoing. D&O liability insurance is especially helpful for small non-profits since directors and officers of small organizations typically don’t have the resources the successfully fight litigation on their own, namely time and money.
General Liability Insurance Usually Doesn’t Cover D&O Claims
Take a good look at your non-profit’s general liability insurance policy—chances are you’ll find that it doesn’t protect directors and officers in the event they are sued. Most general and umbrella liability insurance policies exclude D&O coverage, so be sure to add D&O insurance to fully protect yourself, your board, and your organization.
D&O Lawsuits are Expensive
It can be difficult for non-profits to justify the added expense of D&O liability insurance, but not when you consider the average cost to settle and/or litigate D&O lawsuits is $225,682. That’s just the average; some D&O lawsuits have exceeded $5 million. A D&O liability insurance policy is a small price to pay to protect yourself and your fellow board members from personal and financial ruin.
D&O litigation has significantly increased over the past few years. Settlement and verdict amounts have also increased. On top of the multi-million – and even multi-billion – dollar settlements and verdicts involving class action lawsuits against directors and officers of corporations, non-class action lawsuits are also increasing.
- $38 million verdict against directors and officers of a company accused of fraud, breach of contract and unjust enrichment
- $2.4 million verdict for an executive who claimed that his company breached his employment contract by refusing to redeem his interest in the business when he resigned
Whether taken against a single individual or large corporation, legal action can put the financial security of the defendant in great peril. Even outside of damages that may be due to those pursuing a lawsuit, it make take thousands of dollars to get the representation necessary to defend a nonprofit and its board members against the claims of a plaintiff. Directors & officers liability insurance could mean the difference between successfully navigating a lawsuit and surrendering all financial assets because of it.
Regardless of the size of a nonprofit or its board of directors and officers, every nonprofit organization should secure an appropriate amount of D&O insurance.
Poor Fiscal Expertise
It often takes substantial economic acumen to run an effective nonprofit. As well intentioned as a nonprofit’s board of directors and officers may be, they may make poor monetary decisions because they lack the required financial prowess. In some cases, these decisions may trigger a lawsuit holding these individuals responsible for their actions. Liability insurance can see to it that a nonprofit has the monetary protection it needs to weather such a situation.
Further complicating the roles of nonprofit board members is the common lack of regulation over their activities. Many nonprofits thrive only because of the personal dedication that their board members, volunteers, and employees have toward a mutual goal. They often are left to their own devices when it involves making decisions for the benefit of the nonprofit. Without informed guidance from knowledgeable financial advisors, they may make choices that could risk a future lawsuit, making nonprofit directors and officers liability insurance a mandatory measure of protection.
D&O Liability Insurance Attracts the Best Talent
If you want your non-profit organization to grow, you need to attract the best executive talent. Smart, savvy executives understand the personal risk they assume as directors or officers, which is why the very best and brightest will demand D&O coverage as a condition of serving your non-profit. Even if D&O insurance isn’t a condition of their employment, it tells prospective directors and officers that you care about protecting their personal assets.
Historical Need for D&O Insurance
The earliest marketing of D&O insurance took place in the 1930s, though the volume of policies sold remained relatively low until the 1960s when “merger mania” took place, leading to costly legislation for a number of companies and organizations. In the 1980s, the nation faced a “D&O crisis” in which policies came with high premiums, reduced availability, and extensive exclusionary clauses. Since this time, insurers have worked to make policies more accessible, affordable, and effective for private companies and non-profit organizations.
The need for D&O policies is prevalent in community associations, private companies, and non-profits, but non-profit organizations actually make claims about twice as often as private companies. In the past 10 years, 63% of non-profit organizations in the United States reported D&O claims, and 85% of these claims were employment related. With coverage through Gross & Company Insurance, you can rest assured knowing that your non-profit has the protection it needs in these frequent claims.
Purchasing D&O Policies
- Company Purchased Policies – Most D&O policies are purchased by non-profit organizations or other companies rather than the members of the executive board themselves. With these policies in place, an organization may have a stronger appeal for directors seeking positions.
- Criminal Acts Exclusion – It is important to note that intentional illegal acts and illegal profits are not covered under D&O insurance policies. The coverage is always limited to wrongful acts defined under policy, not by law.
- Insuring Clauses – D&O Policies typically have multiple clauses to provide coverage in many different situations. Side A coverage would pertain to individual directors and officers when not indemnified by a corporation. Side B covers the corporation when individuals are indemnified, and side C protects the organization itself when securities claims are brought against it.
To contact Gross & Company Insurance for a discussion of your organizations D&O insurance needs, call us at (212) 620-0922. We have been in the business of non-profit insurance since 1925, and we remain fully dedicated to designing competitively priced, straightforward policies to all of our clients.