Directors and Officers Liability Insurance

Directors & Officers Liability

Does your organization have a Board of Directors or Senior Executives that help provide direction, influence decision making and help craft policy? Are you on such a board? By participating in such a capacity, somebody becomes personally liable for decisions that they make in that role. In light of the many high profile corporate scandals (i.e. Enron, Health South, Madoff) that have exploded since the late 1990s, elected officials have put the blame for these occurrences at the feet of the corporate leaders. Legislative actions have placed a heavy burden on these individuals to ensure the organizations that they oversee are run in a proper manner. Even if an individual acts in a volunteer capacity, and even if the organization is small, the personal assets of the leader(s) may be at stake.

Are you asking yourself, “Do I have insurance for that?”

Most people know that one component of a typical homeowner’s policy provides liability insurance; however the liability protection provided by such a homeowner’s policy is limited in scope. A homeowner’s policy is designed to respond to “Bodily Injury” or “Property Damage.” It could also be broadened by a “Personal Injury” endorsement which provides a defense against unintentional acts of libel or slander. An umbrella policy could be added to provide an additional limit of liability. These extra precautions are beneficial, and certainly have their place, but may not be helpful in the event of a claim arising from your activities as a board member of an organization. Such a claim would more likely result from a decision that was made (or not made) or for some sort of professional service that was rendered, than from any of these other areas.

There are two things that an organization can do to substantially alleviate this concern for their board members and executive officers. The first is to indemnify its board members and officers from their activities relating to the organization. This needs to be done through its charter or bylaws (we recommend you consult a qualified attorney to help you with this). The next is to purchase a “Directors & Officers” (D&O) policy. These policies are designed to respond to an allegation of “wrong-doing” by one of the covered individuals. These policies are not standardized, so they can vary depending on the insurance company issuing the policy. However, they are, in principle, set up the same way; which again is comprised of two parts. The first is to provide a defense for these individuals for activities for which the organization is not indemnifying them. The second is to reimburse the organization for their costs related to activities that are indemnified.

If you or your organization would like more information about this type of policy, please contact our office. We will be pleased to assist you.

Directors and Officers Liability Insurance

Joshua D. Crowder, AAI-M