First question before serving on a Non profit or For profit Board:
Many professionals are presented with the opportunity to serve as a Board member or Director for a corporate board or non-profit board – this is a significant decision and you should understand the importance associated with the decision.
There are many reasons to serve: personal rewarding, personal and professional development, benefits to society, remuneration, etc. All of which have to be evaluated based upon your personal situation.
However, I want to address the first question before serving on a Non profit or For profit Board:
Can I see a copy of the Directors and Officers (D&O) Insurance policy?
- This is the first question I would recommend anyone ask after being asked to serve on a non profit or for profit board. The protection offered by a Directors and Officers Insurance policy is essential to protect your personal liability associated with the role.
- In this new world of increasing litigation, activist investors, corporate scandals, etc. it could bankrupt an individual if exposed to the expense associated with defending a D&O lawsuit.
- Evaluate the coverages, exposures to the organization, limits available, etc.
- For profit and non for profit organizations have different exposures for board members.
- Different limits are also required based upon the size of the organization and exposure to financial loss. For example, a $1M non-profit has different D&O needs from a Fortune 500 company.
What is Directors and Officers (D&O) Insurance?
- As defined by IRMI, Directors and Officers Insurance is a type of liability insurance covering directors and officers for claims made against them while serving on a board of directors and/or as an officer.
- D&O liability insurance can be written to cover the directors and officers of for-profit businesses, privately held firms, not-for-profit organizations, and educational institutions. In effect, the policies function as “management errors and omissions liability insurance,” covering claims resulting from managerial decisions that have adverse financial consequences.
Why is D&O important?
- Directors and Officers insurance is important as it protects the D’s and O’s from liability associated with decisions.
- After corporate scandals like Enron, Tyco, Worldcom, etc. the Sarbanes-Oxley Act was introduced to protect investors and penalties for fraudulent financial activity are much more severe.
- It is important for directors and officers of corporations (both for profit and non-profit) to understand their duties and obligations, the legal safeguards available to them and the Insurance limits of those safeguards. This is why we feel it’s important for Corporate Boards to have Insurance expertise.
D&O Basic Coverages
- We will cover the D&O policy in greater detail under other posts, but the basic 3 coverages include the following:
- Side-A or “non-indemnified”,
- Side-A provides coverage to individual directors and officers when not indemnified by the corporation as a result of state law or financial capability of the corporation; however, exclusions may apply if a corporation simply refuses to pay the legal defense/loss of a director or officer, or if a bankruptcy court issues an order preventing such indemnification
- Side-B; or “indemnified”,
- Side-B provides coverage for the corporation (organizations) when it indemnifies the directors and officers (corporate reimbursement)
- Side-C; “entity securities coverage”,
- Side-C provides coverage to the corporation (organizations) itself for securities claims brought against it (NOTE: securities claims only coverage applies to publicly traded companies and large private companies; small private companies may be able to obtain broader “entity” coverage)
- Side-A or “non-indemnified”,
Other Resources to help:
- Wall Street Journal – Before you Join that Board
- BoardSource – Serve on a Non profit board
- DLA Piper – Guide for Directors and Officers
- D&O Diary – updates in this coverage and insurance space
Future questions about D&O that we will cover:
- Why corporate boards should have Insurance expertise?
- What is the appropriate limit for most organizations? How to evaluate my limit?
- How does D&O protect me?
- How can I prepare for a board position as an insurance professional?