Insurance Market Source regularly taps into its network of experts for insight into key trends across the insurance landscape. Dario Nalli, Director, Executive Lines, Burns & Wilcox, shares his insight on Directors & Officers (D&O) insurance.
Q: Why is a Directors and Officers (D&O) policy needed at the nonprofit level?
Dario Nalli (DN): D&O, in its most basic form, is a last line of defense for nonprofit organizations. The policy helps organizations and their leaders—board members, presidents, or CFOs—manage defense costs should they be faced with a suit. Even if the claim is unfounded, they still need to defend themselves in court, and fees can be costly. Having an insurance policy that will provide an organization and its leaders with the coverage for defense bills in its time of need is key.
Any time an organization is perceived to have mismanaged the founding mission, they are at risk for their leaders to be called into question. Those managing finances such as donations, grants or membership dues to advance the mission of an organization can often be held to a higher fiduciary responsibility. It is important that clients understand that those who volunteer to serve in official roles do so because they want to help further the purpose the organization represents. This is especially true for nonprofits. Many times, volunteers do not realize that by sitting on a board they are taking on liabilities they would otherwise never encounter. For this reason, it is not only wise from an insurance perspective to purchase a D&O insurance policy, but it is also important from an organizational perspective to offer this type of coverage to leaders. Nonprofit boards and other types of organizations are often governed by bylaws, which typically require organizations to provide insurance to their members. However, board members often do not follow through on confirming insurance is in place due to lack of insurance education.
Q: How does a D&O policy work when a crime has actually been committed?
DN: While D&O coverage assists with legal issues in the face of perceived misconduct, it will not cover legal expenses of a member who has abused their role to commit a crime. This exclusion is typically identified in the policy’s language regarding fraud. It is important for brokers and agents to explain this to their clients up front because there are cases where criminal activity or fraud is not discovered until long after the act has been committed. For example, CFO of GDC Acquisitions, LLC, a facilities products and solutions provider, was indicted in 2010 for making false statements and conspiracy to commit bank fraud1,2. The CFO sought to have GDC’s D&O insurer fund his defense, obtaining a preliminary injunction directing the insurer to pay legal fees. However, the federal jury found him guilty and the insurer petitioned the court to be relieved of paying for the anticipated appeal based on its fraud exclusion. Not only did the court grant that request, but it also directed GDC’s CFO to reimburse the insurer for the amount it had previously expended on his defense. Other c-suite executives, including the CEO and COO, were indicted in the case, but the COO was found innocent. In this case, the legal fees to represent the COO are the only fees that would have been covered by the D&O policy.
Due to the clear exclusions in D&O policies against criminal activity and fraud, they typically do not cover the costs to represent an actual guilty party. However, if a leader or board member in an organization does knowingly commit a crime, and other leaders are called into question as a result, the D&O policy would assist clearing the names of the other officers – as in the case of the COO above. Additionally, D&O insurance does not cover the resulting damage from a crime committed against the organization—a Commercial Crime policy would address this concern.
Q: What is the biggest hurdle to protecting clients with D&O insurance?
DN: Clients often believe they do not need D&O insurance because they trust that their organization is one of high moral standing and will not commit any acts that will bring them into question. However, brokers and agents should emphasize to their clients that it does not matter if the nonprofit organization or its board members actually committed an act working against its mission. D&O insurance is available to protect the organization and its leaders in the instance that someone accuses them of doing so. A simple unfounded accusation can cause a great deal of time, capital, and resources, potentially harming the viability of its future existence. D&O helps to ease the financial burden accompanied with defending the names of a company’s leaders and board members.
These policies work well for nonprofit organizations, such as charities, youth sports leagues, professional associations, and property owners associations. Brokers should stress that purchasing it is simply good business on their end. Officers presiding over nonprofits are often volunteers, and if they are donating their time and energy to a cause, they should be protected. Nonprofits, private companies, and public firms alike should consider it a minor investment into their most important asset – human capital.