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Why every Board of Directors should carry D&O Insurance

Directors & Officers Liability insurance provides coverage for your own “wrongful act” while performing duties as a Director or Officer of the entity, or the“wrongful acts” of other board members.

Why Do You Need Directors & Officers Liability Insurance?

While an organization is legally permitted to cover the costs incurred as a result of personal liability stemming from the activities performed on behalf of the organization, this ability, called indemnification, may not apply to every situation.  The director or officer may become personally liable in their duties performed for the organization.  This means your personal assets are on the line for decisions you make on a board for which you serve.

The basic responsibility of the director is to represent the interest of the organization, their members and their constituents and to do so within the law.  The basic duties of the director are:

  1. DILIGENCE:  Act in the best interests of the organization and its members
  2. LOYALTY:  Place the interest of the organization first, and do not use the directors’ position to further private interests
  3. OBEDIENCE: Act within the scope of the by-laws of the organization, governing laws, and other rules & regulations that apply to the organization.

Given this role of a director, it is important to note that you can personally be held liable for claims arising from:

  • Activities of Volunteers and/or staff in the name of the organization
  • Employee discrimination
  • Wrongful dismissal
  • Breach of duties as described above

Claims may be made by:

  • Volunteers
  • Employees (class action negligence – mismanagement, discrimination, sexual harassment)
  • Government Bodies (breach of fiduciary duty)
  • The Entity Itself
  • Current or former directors & officers
  • Suppliers (misrepresentation)
  • Customers
  • The General Public

A Directors & Officers liability insurance policy helps protect the organization from the financial loss of having to defend, and indemnify any party that suffers an insured loss.  Furthermore, it helps ensure that your personal and business assets are not affected by your participation on a board.

In order to protect the organization and yourself, the board must:

  1. Examine the operations of the organization and ask what can go wrong, and what harm could result?
  2. Identify practical measures that can be taken to prevent such harm from occurring
  3. If harm does occur, identify the steps that can be taken to lessen the impact of harm, and pay for any resulting damage or losses.

In a survey done by Chubb Insurance, the average payout for a D&O claim in 2012 was $329,756* with nearly 14% of companies surveyed being part of a D&O claim.  It is important to note that defense costs alone can be enough to cripple an organization.

D&O coverage is critical for non-profit entities as well as for-profit entities.  I highly recommend that every not-for-profit organization carry a Directors & Officers Liability Insurance policy to protect their members. Your legal counsel will tell you: Never join a board of directors without the existence of this type of coverage.

As there are many different policy wordings available, ISU Wilson Insurance can help you navigate specific coverage options.

If you have any questions or concerns, please do not hesitate to contact us.