By John Ergastolo
When something goes wrong with the management of an organization, it’s typically the directors and officers who are held accountable for the (actual or alleged) mismanagement. While these individuals are typically afforded indemnification by the organizations they serve, there are instances when that indemnification is either unavailable — financial insolvency of the organization, for instance — or not allowed by law. In such cases, a Directors and Officers (D&O) insurance policy can protect their personal assets.
A look at the market
According to Advisen Insurance Intelligence, there are currently 77 U.S. admitted and non-admitted insurance carriers writing private company and nonprofit D&O liability insurance in the United States. Meanwhile, the number of carriers currently underwriting faith-based organization D&O liability insurance is much lower than the 77 noted by Advisen — by my estimate, about two dozen.
The carriers writing D&O liability insurance for large nonprofit organizations prefer to underwrite the D&O liability risk separately so they can tailor their policy (manuscript) to the specific needs of the insured. Smaller organizations — with smaller budgets — tend to buy their D&O liability within a package policy, which can be far less expensive than buying standalone coverage.
However, there are a few key disadvantages to buying D&O coverage in a package:
- The limits protecting the directors and officers can sometimes be eroded by claims on other lines of coverage that are also being covered within the package policy.
- Package policies often don’t have the broadest available coverage available in the current D&O market.
- Standalone policies are much more easily enhanced than package policies.
It’s important to note that D&O liability insurance provides coverage to the organization and its directors, officers, executive, employees and committee members for allegations of mismanagement of the organization.
The policy is not intended to cover allegations or actual bodily injury or property damage claims. Other policies (General Liability, Workers Compensation, Property Insurance and so on) can provide the coverage the D&O liability insurance might not cover. In general, the D&O policy is intended to provide coverage for allegations of mismanagement of the organizations brought by the stakeholders of the organization — donors, employees, regulatory bodies, etc. The trigger for a claim that could be covered under a D&O liability policy would be: (1) An individual within the organization or the organization itself would be named in a complaint, proceeding or suit, and (2) The definition of wrongful act within the D&O liability would have to be triggered. Here’s a sample definition:
“Wrongful Act” means any error, misstatement, misleading statement, act, omission, neglect or breach of duty committed or attempted, or allegedly committed or attempted, by the Insured Organization or by one or more Insured Persons, individually or collectively, in their respective capacities as such, including but not limited to any Wrongful Employment Practices.
All organizations should consider purchasing D&O liability insurance to help insure the financial viability of the organizations, and to protect the personal assets of the individuals managing the organization.
John Ergastolo — a member of the Religious & Nonprofit Practice at Arthur J. Gallagher & Co. — is Area Executive Vice President, Management Liability Practice.