Question Of The Week: What Does D&O Insurance Cover?
Editor’s Note: Each week, non-profit expert Don Kramer will answer a question about non-profit law or governance.
QUESTION: In response to an earlier question, you said that a Directors and Officers (“D&O”) insurance policy would probably not help a nonprofit that failed to pay its taxes, failed to remit health insurance premiums and mismanaged a governmental grant. But a D&O policy covers directors & officers individually, right? Not the charity itself? Wouldn’t that mean that because tax and insurance liabilities are on the charity they wouldn’t be covered? And even if it covered the managers’ personal liability, wouldn’t the organization still be liable to the grantmaker? —From the Website.
ANSWER: Modern D&O insurance policies normally protect both the organization and its officers, directors and volunteers from the consequences of their “wrongful acts” in managing the organization. There was an earlier time when D&O policies protected the officers and directors individually, and provided funds for the organization to meet its obligation to indemnify them in the event of litigation, but did not always protect the organization for its organizational liability for what its officers and directors had done, or failed to do. That type of policy seems now to be a relic of the past.
With the advent of director protection acts and volunteer protection laws in the latter part of the 20th century, there have been very few instances where officers, directors, or volunteers are found personally liable for wrongful acts, except for those types of acts typically excluded from statutory protection and usually specifically excluded from policy coverage — including liability for criminal acts, failure to pay or remit taxes, and incidents involving self-dealing (where the self-dealers are not protected). Where the organization nevertheless has organizational liability for non-criminal and non-tax related acts, the policies usually provide coverage.
Traditionally the most frequent type of claim brought under D&O policies has been for wrongful employment practices (which is often a specific protection provided under the policy). Other policies protect against personal injury to individuals defamed in publications, or against claims of copyright infringement. D&O policies do not cover bodily injury, which would ordinarily be covered by general liability policies. This is not stuff you should try to navigate yourself. You should find a broker who understands nonprofits and understands the particular risks faced by an organization like your own. You may not need protection often, but when you do, you want to be confident that you have what you anticipated.
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