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Should you have directors and officers (D&O) insurance?



Insurance for directors and officers (D&O).

There are many ways to serve your community. Whether you’re on the board of a Tarrytown-based women’s nonprofit or interested in serving your local baseball team or city council, being a director or officer is a great way to make an impact. But what if a simple decision results in a lawsuit? What if you are accused of misappropriating funds or causing harm to someone your organization serves? Directors and officers (D&O) insurance is designed to protect against these types of scenarios.

What is D&O insurance?

Board and officers insurance is a type of liability insurance that protects the officers and directors of an organization. D&O insurance protects personal assets in the event that one is sued by employees, suppliers, customers or other parties for actual or alleged wrongdoing in managing the business.

How does it work?

Basically, a D&O policy covers legal defense costs and damages awarded in lawsuits against directors and officers. It also covers costs related to such trials.

Coverage is not available for outright fraud and intentional criminal activity. It also does not cover personal injury, physical damage to your property and lawsuits between management.

The purpose of the policy is to provide cover for losses suffered by directors as a result of claims made against them. Anyone who feels they have been injured by the actions of a director or officer can make a claim. The types of claims include:

  • Breach of fiduciary duty
  • Negligent misrepresentation
  • Negligent hiring or retention
  • Fraudulent Transfer or Concealment
  • Misappropriation of funds

Do you need D&O insurance?

Nonprofit and volunteer officers need directors and officers (D&O) insurance just like for-profit directors and officers. In fact, according to a recent study by Ideally quarterly, organizations whose revenue model tends to be driven by voluntary contributions often face fund management problems. This means they are likely to be sued just like other companies.

Additionally, the United States has a law called “Duties of Officers.” It provides that officials must act in good faith and with a reasonable degree of care. Therefore, whether you work in a social or religious setting, such as a church, charity, or home owner’s association (HOA), you must act in the best interest of the organization or face a lawsuit.

It is important to have the right insurance in place to protect yourself.

  • Even if you do nothing wrong, someone can sue you without good reason. D&O coverage protects against this vulnerability.
  • As a board member or officer of an organization, you have access to valuable information about your organization that can make you a target for lawsuits.
  • The cost of defending against a lawsuit can be staggering – even if the lawsuit is unfounded. A D&O policy covers your defense costs, up to policy limits.

What activities and scenarios warrant D&O insurance?

If you are involved in the following activities and scenarios, you should probably have D&O insurance:

  1. To operate an organization that receives tax-deductible contributions. If you collect donations, you may be accused of mismanagement of the fund or embezzlement. If money is stolen via cyber hacks or fraud, board members can be accused of not providing leadership in these areas.
  2. Lead a charity or other organization that serves the public. If a member of the public was harmed, molested or harmed by a member of your organisation, you could be accused of failing to provide appropriate background checks or oversight.
  3. Being a member of an advisory board, committee or panel. You have power over people’s careers and livelihoods. If you make decisions that turn out to be wrong – or if those decisions lead to legal action – you may be held personally liable for any damage caused.

The point

Insurance for directors and officers (D&O) is an important protection. If your organization does not purchase coverage for you, you should purchase it for yourself. Additionally, those who volunteer should consider one umbrella policy for an extra layer of personal liability protection.

Contact us if you want to know more.




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