By Robert Erven Brown
Why your church should care about D&O insurance
Serving on your church board of directors is surely a righteous thing to do. But, can a director’s personal wealth really be attacked by a creditor of the church? More directly, can an injured church member sue the directors of his or her church personally?
Sadly, quite a few legal theories support an award of damages against the personal assets of your church’s board of directors (or elders, deacons, trustees, overseers, presbyters and a host of other terms).
What about the corporate shield?
The corporate shield was designed to protect the officers, directors, members and volunteers of a Corporation against claims which arise from authorized corporate activities. In Arizona, for example, it’s difficult to pierce the corporate shield since the claimant must prove that the corporation was used for fraud, that funds were co-mingled, and virtually that the corporation had become the “alter ego” of the controlling persons.
The problems. The purpose of this article is to draw attention to the fact that, from a risk management perspective, virtually every church should carry D&O insurance. Most sophisticated director candidates won’t serve on the board unless this coverage is provided.
General liability insurance vs. D&O liability policy
Exclusions From, General Liability Coverage: A general liability policy ordinarily protects the “authorized agents” of the church while they’re performing their duties within the scope of their authority. This includes protecting directors and officers against the cost of defending, and against paying damages for claims arising from bodily injury, property damage, personal injury and advertising injury. However, it normally excludes coverage for the financial consequences of alleged wrongdoings which are covered by the typical D&O liability insurance policy.
For example, a typical general liability policy does not protect officers and directors against claims arising from:
- Mismanagement of the business and operations
- Competitor suits involving unfair trade, antitrust or
- intellectual property infringement
- Misrepresentation in connection with private placements of stock or debt or in the sale all part of the business
- Regulatory actions brought by the government, such as the FTC, DOJ, or the FDA
- Failure to deliver services
- Self-dealings and conflicts of interest
What D&O insurance does cover. D&O insurance is designed to protect church directors, officers, employees and (sometimes!) volunteers against defense costs and payment of damage claims arising from alleged or actual: breaches of fiduciary duty; neglect; errors; misstatements; misleading statements; omissions; Securities and Exchange Commission registration and anti-fraud violations; breach of the duty of loyalty to the corporation; insolvency; and claims which are not indemnified by the church due to limits caused by state law, derivative judgments or settlements, public policy, equitable considerations, and the provisions of the corporations articles and bylaws.
Obtain expert help before you buy
Here are just a few of the issues to consider in evaluating D&O insurance coverage and whether to negotiate for endorsements to the policy:
- Is this a standalone policy or part of a master policy?
- Are volunteers included within the definition of “insured”?
- Are claims arising from employment practices covered?
- Do defense costs reduce the amount of total coverage available to pay a claim?
- Does the policy cover the organization’s obligation to indemnify a director?
- Is the carrier required to advance the defense costs, rather than simply reimbursing the organization after paying the defense costs?
- Does your organization have input in deciding which law firm will defend your claim?
- What are the notice requirements for filing a claim?
- What’s the definition of a claim?
- Do “claims” include investigations, administrative proceedings and arbitrations?
- Does the policy provide coverage for punitive or exemplary damage claims?
- Can you obtain an exclusion eliminating imputation of liability between innocent insureds?
- Is coverage provided for the defense of criminal charges?
- Is it a claims-made policy or an occurrence-based policy?
- Are there gaps in coverage with prior policies?
- Can you get “prior acts coverage”?
- Should you consider an extended reporting period endorsement?
Lest you finish reading this article in a state of despair, remember that most cases of liability won’t expose the personal assets of a director.
Even so, D&O insurance needs to be addressed and appropriately endorsed coverage obtained.
Take proactive steps now to ensure the good deeds of your directors and officers will go unpunished.
Robert Erven Brown is an attorney licensed to practice in Arizona. He and his nonprofit practice group work with nonprofits and churches, helping them manage key operations connected with their missions, visions and causes. As permitted by local Rules of Ethics, they collaborate with attorneys who are licensed in states other than Arizona.
He is the author of Legal Realities: Silent Threats to Ministries, which describes his Campus Preservation Planning© initiative — a comprehensive program designed to manage the wide array of risks facing non-profit organizations. Footnotes were omitted.
This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. “From a Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers and Associations.” Simply reading this material this does not create an attorney / client relationship with Brown, as this article is general legal information, not legal advice. A formal attorney / client relationship will not be established until a conflict check is completed and an engagement letter has been signed by both the attorney and the client. No “informal” legal advice will be provided by telephone. Simply sending an e-mail to Brown will not create an attorney / client relationship.