Directors and Officers (D&O) coverage plays a vital role in an organization’s risk mitigation strategy, but for some not-for-profits, the insurance coverage may go under the radar. Executive leaders and board members should understand the basics of D&O coverage so they can carry out your fiduciary duties, as well as protect personal and organizational assets. The following provides a primer for what a not-for-profit’s C suite and board should know.
1. The Definition of D&O Coverage
The most basic question should be addressed first: what is D&O? This type of insurance coverage protects directors and officers of an organization in the event the director or officer is sued for an alleged wrongful act. It covers an organization’s executives, directors and officers from liability arising from their decisions and actions taken on behalf of the organization, such as allegations of misstatements, reporting errors, inaccurate disclosures, prospectus misrepresentations, management decisions and other actions. D&O coverage does not protect against allegations of bodily injury or property damage.
D&O covers allegations of what insurers consider “wrongful acts.” These acts typically result in allegations of financial loss. An example of a wrongful act or allegation could include providing substandard investment oversight or other management negligence issues. Customers, vendors, suppliers and creditors can all file claims against organizations.
2. Your Organization’s D&O ‘Coverage Layers’
Several layers constitute D&O coverage, called Coverage A or B, or Side A or B.
Coverage A provides defense and pays losses arising from negligent acts of an officer or director of a company where the entity cannot or will not indemnify the directors and officers. If a company refuses or is legally unable to protect its directors and officers, Side A of the D&O policy is direct insurance for the directors and officers. This is “peace of mind” coverage for executives and/or those who sit on a board.
Coverage B reimburses corporations for losses the organization pays to indemnify their directors and officers for claims filed against them. These usually include defense costs and judgments.
Two additional coverages available under the D&O policy, known as Coverage (or Side) C and D, are vital to many organizations. If sued by an outside entity, Side C coverage protects the organization against claims made against the organization for a private entity and for alleged securities claims for a public company.
Side D provides coverage for investigation costs on behalf of an insured entity, although only those resulting from a derivative demand. A derivative demand is a written demand by one or more equity or security holders of the company upon the company’s board of directors to bring a civil proceeding on behalf of the company against any executive for a wrongful act. Both Side B and Side C protect the balance sheet of the organization.
Most D&O policies offer protection against allegations of security irregularities. (This would technically only apply to public companies.) Additionally, employment practices liability coverage is increasingly common on D&O policies. This coverage provides defense and indemnity against allegations of wrongful termination, sexual harassment, wage and hour claims, and other violations of various employment laws.
Insurers write D&O policies on a claims-made basis. This means a claim triggers coverage, not the act itself. Claims-made coverage means acts committed prior to the policy period (provided there is no knowledge and you have prior acts coverage) and during the policy period may be covered. Claims for acts that occurred during the policy period but filed after the policy’s expiration may not be covered. If you plan to make any changes to your D&O insurance policy, it is important to work with a knowledgeable insurance professional who understands the dynamics of the policy language/structure and of your business or organization to help to design a risk management program specifically suited to your organization’s goals and objectives.
3. In Today’s World, D&O Coverage is a Necessity.
Claims alleged against an organization’s board, executive or management team, or boards on which the leadership team serves, are a real possibility in today’s business environment. D&O coverage is a must have to protect one’s personal assets. Insurers can recount many examples where the mere allegation of a wrongful act creates a major financial loss for an organization, as well as its management and board. Allegations of wrongful conduct also can result in unintended consequences, such as delaying the implementation of key initiatives.
For more information on risk management and insurance topics, please contact us.
Raul Socha, MBA, CLCS, cyRM is Vice President in CBIZ’s Risk Management & Insurance division. He can be reached at 617.999.9475 or firstname.lastname@example.org.