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October 6, 2011 / Brett Cohrs

Directors and Officers Liability 2: What’s it for?

A couple days ago I discussed who is insured under a nonprofit Directors and Officers (D&O) Liability policy.

Today’s Topic: What types of claims is a nonprofit D&O policy supposed to address?

One of the common misconceptions is that D&O coverage covers Ds and Os for anything that could possibly go wrong. A client gets hurt and sues the Ds: D&O policy. A counseling organization provides horrible advice and the patient sues the Ds: D&O policy.

The misconception is dangerous. Ds and Os have coverage under other policies for those items.

So then, what is a D&O policy for?

It addresses claims related to wrongful acts committed through the management decisions of the board and management. MOST nonprofit D&O policies include in some form or fashion a line item for Employment Practices Liability (EPL). Therefore, a nonprofit D&O policy also addresses EPL issues such as wrongful termination, discrimination, etc.

Let me bullet point some coverage provisions and some other items to consider when constructing an insurance program for your nonprofit:

First, what does a D&O with EPL policy normally address (Remember you MUST check your own policy and discuss with your agent):

  1. Wrongful act suits against the board and leadership: Did they mismanage a donation? Did they violate some kind of verbal agreement? (honestly, this is a tough one to nail down which makes it important—you’re insuring for unexpected situations, so can’t always develop hypotheticals).
  2. Employment Practices Issues: Wrongful termination, discrimination, sexual harassment, etc.
  3. Third Party Suits: Different from many for profit EPL policies, nonprofit policies address discrimination and/or sexual harassment suits brought by third parties (i.e. I sue you because I think you didn’t provide service because of discrimination against 40 year old white males).

Second, where to look in your policy to find what it addresses:

  1. Definition of Wrongful Act: Find this definitio and read it. It will clue you in on what types of occurrences or actions the policy addresses.
  2. Exclusions: VERY IMPORTANT. Review the exclusions and see if any of these cause alarm. More than likely, the coverage is addressed elsewhere, whether General Liability, Professional Liability, or another policy. Note the exclusions. If any alarm you, consult with your insurance pro to find where the coverage could be picked up in a different type of policy.

Remember that unlike many common business policy types, D&O and EPL insurance policies vary greatly from company to company. Get familiar with yours.

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