Board Members, Know Your D&O!

If you serve on a NFP Board, thank you for your service. NFP organizations need qualified, dedicated leaders to staff their Boards. The work you do is crucial to the viability and relevance of the sector.  Under normal circumstances, Board membership is not a high-risk activity.  However, sometimes things go wrong which can result in organizational and personal consequences.  There are plenty of NFP horror stories out there, so, in response, this article addresses the need for Directors and Officers Insurance, also known as D&O.

What is D&O?

Directors and Officers insurance (D&O) is an insurance policy that organizations purchase to protect its officers and Board in the event of a claim against the organization.  As a Board member, you can be named in a law suit stemming from the actions of the organization, so it is very important that this coverage is in place. Even if there is no wrong doing, lawsuit defense can be an expensive proposition which should not be a personal burden to the Board Members.  Many organizations indemnify Directors and Officers, however, without D&O insurance, you may be at risk if the organization does not have the financial means to handle the legal costs or any potential settlement costs.

 

What Does D&O Protect?

All business activities have inherent risks. In addition, there are numerous opportunities for employee-related issues. D&O insurance provides protection from lawsuits related to the operations of the organization, for decisions made by Officers and the Board, as well as, employee-related issues, such as wrongful termination.

What D&O Does Not Protect

D&O protection can be lost or excluded in certain instances.  These situations should be outlined in the exclusions section of the D&O policy, so you should be familiar with the document.  Exclusions include;

  • Actions not authorized in your By Laws
  • Actions not in line with fiduciary care responsibilities, including neglecting duty or significant undisclosed conflicts of interest
  • Fraudulent and or intentionally illegal activities
  • Policies may have exclusions for lawsuits brought by existing or former directors

What is At Risk Without D&O?

  • For the Board member personally, if the organization does not have D&O insurance, the member may be responsible for defense costs during the lawsuit process, as well as, a negative financial impact associated with a settlement or award, if the organization does not have the means to pay
  • For the Organization, in addition to the defense costs and financial impact of a settlement or award, there may also be challenges in finding qualified Board members due to the lack of coverage
  • Without insurance, the organization may simply lack of capacity to mount a defense, which may result in closure or severe damage to organization’s viability

 

But the Organization Cannot Afford It!

I have heard this from several organizations that I have consulted with.  My answer is always, “You can’t afford not to have it.”  If your organization deals with people, then a major issue can be only one conversation or bad decision or unfortunate accident away.  When that major issue comes, it could end the organization and that is not an exaggeration.

 

Best Practices

  • The organization should;
    • Maintain D&O insurance
    • Periodically review of coverage levels based on size and scope of operations
    • Work with broker to balance coverage to cost and limit exclusions when possible and financially viable
    • Review D&O (and all other insurance policies) with the Board on a periodic basis
  • The Board should;
    • Conduct a periodic review of By Laws. Ensure major decisions adhere to the By Laws.  Update the By Laws to reflect changes in the business
    • Complete Board, Committee and Board Member assessments to ensure all are complying with duties and fiduciary responsibility
    • Have a comprehensive Board orientation process for new members. The process should clarify responsibilities, set expectations and provide instruction on corporate documents, policies and procedures
    • Review with management the D&O (and other insurance) on a periodic basis

 

Bottom Line

Think hard before joining the Board of an organization that does not have D&O insurance.  You may be putting yourself at unnecessary risk.  Familiarize yourself with the D&O policy and understand any limitations of coverage.  Proactively engage in discussions about coverage limits and insurance costs.  Speak up if you have concerns that either management or the Board are taking actions that are not in line with the organization’s By Laws.

If this content is valuable to you, please consider following or connecting with me on LinkedIn or via my blog Not For Profit Beyond the Numbers

Make learning a shared experience! Please share your comments. Thanks –mike

If you are interested in learning more about D&O insurance, the link below is to a NonProfit Quarterly article on the topic. NPQ Article

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