Directors' & Officers' Liability Insurance (D&O)

This document is provided for educational purposes only.

The Center is an independent nonprofit organization that does not sell insurance or endorse specific insurance providers.

For further information or assistance, visit www.nonprofitrisk.org.

Directors’ & Officers’ Liability Insurance (D&O)

Excerpted From Coverage, Claims and Consequences: An Insurance

Handbook for Nonprofits, Second Edition

ISBN 1-893210-02-2

To purchase this publication go to: http://nonprofitrisk.org/store/coverage-claims.shtml

Another liability policy to consider is a nonprofit directors’ & officers’ liability policy.

The D&O policy protects the organization, its directors, officers, employees and

volunteers for their “wrongful acts” in governing and managing the organization. The

actual people insured depends on which policy the organization purchases. Wrongful acts

are allegations of breach of duty, errors and omissions, and other acts that cause harm to

the organization or its members. The D&O policy doesn’t cover loss for bodily injury or

property damage; that’s covered under the general liability policy.

If the nonprofit publishes a newsletter, marketing materials etc. you should consider a

D&O policy that includes publishers’ liability and personal injury. This provides broader

coverage for libel, defamation, copyright or trademark infringement than the general

liability policy.

If you have employees, you’ll also want to make certain that your D&O policy includes

employment practices liability (EPLI) coverage or that you purchase a separate EPLI

policy. Employment related claims are the most common D&O claims filed against

nonprofits.

The main argument for the D&O policy is that even with state and federal volunteer

protection laws, a board member can be held personally liable for mismanagement of the

organization. As for limits, the base limit should be $1 million unless the organization is

very small. (Note: you should review the volunteer protection laws which apply in your

state—the Nonprofit Risk Management Center’s Web site features a publication

describing the statutory protections for volunteers in various states.

(http://nonprofitrisk.org/library/ state-liability.shtml).

Professional Liability Coverage Under the Nonprofit D&O Policy (page 113)

There is a fairly clear distinction between professional liability and directors’ & officers’

liability. Professional liability coverage is liability for providing professional services to

clients or patients. D&O liability is liability for corporate governance. For nonprofits,

confusion about the difference arises principally from the significant expansion of

coverage under nonprofit D&O beyond the traditional coverage provided under for-profit

This document is provided for educational purposes only.

The Center is an independent nonprofit organization that does not sell insurance or endorse specific insurance providers.

For further information or assistance, visit www.nonprofitrisk.org.

D&O policies. In an attempt to acknowledge this expansion of coverage into essentially a

different type of policy, some underwriters began to reclassify nonprofit D&O under new

names such as Association Professional Liability or Nonprofit Professional Liability.

This understandably led some nonprofits to mistakenly believe that their D&O policy was

a professional liability policy.

The scope of a particular nonprofit D&O policy may be so broad that it sometimes can, in

fact, provide incidental professional liability coverage, although this is never its primary

intent. Nonprofit D&O coverage is for wrongful acts subject to policy exclusions, so the

policy will provide professional liability coverage to the extent it is not excluded.

Because D&O policies exclude bodily injury and property damage, incidental

professional liability provided under the policy will be limited to pure financial loss

arising from the acts of professionals such as attorneys, accountants, real estate managers,

investment managers, or financial planners. Claims for emotional distress or mental

anguish, which commonly arise from counseling or social work, will usually not be

covered because most nonprofit D&O policies exclude emotional distress and mental

anguish as part of their bodily injury and property damage exclusion.

A typical D&O bodily injury and property damage exclusion reads as follows:

Any actual or alleged: bodily injury, mental anguish, emotional distress, loss of

consortium, sickness, disease or death of any person, or damage to or destruction of any

tangible property including loss of use thereof.

Employment practices liability will usually be exempt from the mental anguish and

emotional distress portion of this exclusion.

Many nonprofit D&O policies also have specific exclusions for professional liability.

These exclusions are either built into the policy itself or added by endorsement. For

example:

Exclusion Example #1

The rendering or failure to render medical, psychological or counseling services or

referrals

Exclusion Example #2

Claim or claims based upon, arising out of, directly or indirectly resulting from or in

consequence of, or in any way involving the performance of any professional services for

others for a fee, and caused by any act, error or omission

This document is provided for educational purposes only.

The Center is an independent nonprofit organization that does not sell insurance or endorse specific insurance providers.

For further information or assistance, visit www.nonprofitrisk.org.

Exclusion Example #3

Any claim made against any insured based upon, arising out of, directly or indirectly

resulting from, in consequence of, or in any way involving any liability arising out of any

error or omission, malpractice or mistake of a professional nature committed or alleged

to have been committed by or on behalf of the insured in the conduct of any of the

activities of the organization

Exclusion Example #4

Claim or claims based upon, arising out of, directly or indirectly resulting from or in

consequence of, or in any way involving the rendering or failure to render professional

services in connection with the member’s business as a provider of professional services,

including but not limited to: providing medical, surgical, chiropractic, dental,

phlebotomy, acupuncture, psychiatric or nursing treatment, diagnosis or services,

including the furnishing of food or beverage in connection therewith; furnishing or

dispensing drugs or medical, dental or surgical supplies or appliances; providing veterinary

services; offering any advice in connection with any of the above

The first two of the four listed exclusions are narrow enough to potentially leave

coverage for incidental professional liabilities. The last two exclusions attempt to exclude

professional liability entirely.

D&O Insurance—excerpted from Chapter 6

Prior to the early 1960s, overseas insurers such as Lloyd’s of London were the only

writers of directors’ and officers’ (D&O) policies for for-profit businesses. The first

D&O policies were intended to protect board members of publicly traded corporations

from shareholder lawsuits. Coverage was for wrongful acts, which were commonly

defined as “any act, error, or omission by the Directors or Officers of the Company.”

Bodily injury and property damage were always excluded (BI & PD Exclusion). In the

1960s, two major U.S. companies, St. Paul and American International Group (AIG)

began writing corporate D&O policies.

The number of policies sold grew considerably after 1968 when Delaware (as a leading

state for corporate domiciles) passed new laws authorizing corporations to purchase

D&O liability coverage.

Today, several dozen U.S.-based insurers sell the vast majority of D&O coverage for

businesses and nonprofits.

Besides the number of companies, each insurer offers many different forms, including, in

some cases, one or more policies written specifically for nonprofits. Insurance companies

then further complicate D&O policies by attaching endorsements that modify coverages.

This document is provided for educational purposes only.

The Center is an independent nonprofit organization that does not sell insurance or endorse specific insurance providers.

For further information or assistance, visit www.nonprofitrisk.org.

Is D&O Coverage Required or Necessary?

State laws permit—but do not require—the purchase of directors’ and officers’ liability

coverage by a nonprofit organization. There are, however, various volunteer protection

statutes at the state level whose terms are affected by whether a nonprofit maintains

liability coverage of a prescribed amount. For example, under a number of state

volunteer-protection statutes immunity for simple negligence by a volunteer is contingent

upon the nonprofit organization’s purchase of liability insurance with a specified limit.

This means that a volunteer working for a nonprofit without insurance is vulnerable to

claims, even those alleging simple negligence. For example:

District of Columbia

D.C. Code § 29-599.15, Non-profit volunteers—Any person who serves in good faith as a

volunteer, including an officer, director, trustee or any person who performs

uncompensated services for the organization, is immune from civil liability for acts and

omissions within the scope of duty.

This immunity applies only if the nonprofit corporation maintains liability insurance with

a limit of coverage not less than $200,000 per individual claim and $500,000 per total

claim that arise from the same transaction.

In several states the protection afforded volunteers under the state laws disappears if the

volunteer is protected by liability insurance:

Idaho

Idaho Code § 6-1605, Non-profit directors and volunteers—Officers, directors and

volunteers who serve a nonprofit organization or corporation without compensation are

immune from civil liability arising out of conduct that was within the course and scope of

their duties and was at the direction of the corporation or organization.

Exceptions: No immunity attaches to the following categories of conduct:

 conduct which was willful, wanton, or involves fraud or knowing violation of the

law;

 conduct for which liability insurance was purchased to the extent that it was

purchased;

 intentional breach of fiduciary duty owed to the organization, corporation or

members;

 acts or omissions not in good faith and involving intentional misconduct, fraud or

knowing violation of the law;

This document is provided for educational purposes only.

The Center is an independent nonprofit organization that does not sell insurance or endorse specific insurance providers.

For further information or assistance, visit www.nonprofitrisk.org.

 a transaction from which the officer, director or volunteer received an improper,

personal benefit;

 damages that result from operation of a motor vehicle; and violations of Idaho

Nonprofit Corporation Act.

North Carolina

N. C. Gen. Stat. § I-539.10, Charitable volunteers—A volunteer who in good faith

performs reasonable services for a charitable organization is not liable in civil damages

for acts or omissions resulting in injury, death or loss arising from the services rendered.

Exceptions: the acts or omissions of the volunteer amount to gross negligence, wanton

conduct or intentional wrongdoing, the acts or omissions occurred while the volunteer

was operating a motor vehicle. A volunteer is deemed to have waived immunity to the

extent that he has liability insurance.

In two states, a volunteer is not liable for civil damages simply if the nonprofit he or she

serves maintains general liability insurance: Kansas and Hawaii.

Kansas

K. S. A. § 60-3601, Nonprofit volunteers—If a nonprofit organization has general liability

insurance, a volunteer of the organization is not liable for damages in a civil action for

acts or omissions.

Hawaii

HRS § 662-D2, Volunteer immunity—A volunteer is immune from civil liability for an

act or omission resulting in damage or injury caused by the volunteer’s negligent

conduct. This applies if the volunteer acted in good faith and within the scope of duty for

a nonprofit organization or corporation, a hospital or a government entity; and if

organization has a general liability policy during the time of injury and at the time the

claim is made of not less than $200,000 per occurrence and $500,000 aggregate; or the

organization has total assets of less than $50,000.

This document is provided for educational purposes only.

The Center is an independent nonprofit organization that does not sell insurance or endorse specific insurance providers.

For further information or assistance, visit www.nonprofitrisk.org.

General Liability and Directors & Officers Liability — Differences and

Similarities

This material was developed by David Szerlip, David Szerlip & Associates and is reprinted here

with permission.

Differences

General Liability Directors & Officers Liability

Covers Bodily Injury and Property Always excludes Bodily Injury and Property

Covers accidents only. Claims usually arise

directly from operations rather than

governance.

Covers Wrongful Acts. Claims usually arise

from governance or management decisions.

Board members, management staff and the

organization itself are likely to be defendants.

Usually Occurrence Liability Usually Claims-Made Liability.

Standardized policy wording. Non-standard policy wording.

Similarities

General Liability Directors & Officers Liability

Covers liabilities common to all nonprofits. Same

Provides broad catch-all coverage. Other

liability coverages are more specific and

narrower in scope.

Same

Includes all board members, employees and

volunteers as Insureds.

Same

Nonprofit D&O Claims Examples

Employment Practices Claims Non-employment Claims

 Wrongful Termination

 Breach of Employment Contract

 Discriminatory Hiring Practices

 Failure to Promote

 Negligent Evaluation

 Retaliation

 Sexual Harassment

 Wrongful Discipline

 Failure to Grant Tenure

 Invasion of Privacy

 Employment Related Defamation

 Employment Related Infliction of

Emotional Distress

 Misallocation of Funds

 Breach of Fiduciary Responsibilities

 Self Dealing / Conflict of Interest

 Anti-trust or Restraint of Trade Violations

 Third Party Discrimination, Defamation, or

Invasion of Privacy

 Negligent Financial Advice to Third

Parties

 Failure to Maintain Insurance

 Tortuous Interference with Contract

 Breach of Contract

 Failure to Accredit or Certify

 Infringement of Trademark, Patent or

This document is provided for educational purposes only.

The Center is an independent nonprofit organization that does not sell insurance or endorse specific insurance providers.

For further information or assistance, visit www.nonprofitrisk.org.

To Buy Coverage or Not

Under a D&O insurance policy, coverage is provided for the defense of actual or alleged

wrongful acts by directors, officers and other insureds under the policy. The person filing

suit may be an insider, such as an employee or volunteer, or an outsider, such as a service

recipient, donor or governmental official.

While directors’ and officers’ liability insurance may provide defense against allegations

of fraudulent, criminal or dishonest acts, these acts are not insurable (nor indemnifiable)

as a matter of public policy. However, many policies contain a nonimputation clause that

states that the fraudulent, criminal or dishonest acts of one insured will not be imputed to

an innocent insured. In other words only insures actually guilty of fraudulent, criminal or

dishonest acts will be excluded from coverage.

Every nonprofit must decide for itself whether or not it should purchase D&O insurance.

Most nonprofit bylaws contain an indemnification agreement, whereby the nonprofit

agrees to pay the legal expenses incurred by board members who must defend themselves

in suits based on their work as board members. These board member indemnification

agreements are hollow promises unless the nonprofit has financial resources to fund the

indemnification. While a small percentage of nonprofits may be able to set aside funds to

pay for future litigation costs, the vast majority of organizations will find it easier to

afford an annual premium for D&O insurance.

Some wrongful acts are neither insurable nor indemnifiable, however the vast majority of

allegations against the board, staff and the organization will be activities potentially

covered by a D&O policy.

Sources of Claims Against Nonprofit Boards

One of the myths associated with nonprofit D&O insurance is that claims are unlikely

because nonprofits do not have shareholders. While claims against nonprofits may be rare

for other reasons, it is not because of a lack of potential plaintiffs. Nonprofits serve large

and varied constituencies to which their boards owe specific fiduciary duties similar to

duties owed by corporate boards. These constituencies are potential plaintiffs in legal

actions brought against nonprofit boards. Potential claimants in a suit against nonprofit

directors include:

1. Insiders

The current and former staff of a nonprofit may bring actions alleging a host of wrongful

acts, including wrongful termination, discrimination, sexual harassment, Americans with

Disabilities Act violations and more.

This document is provided for educational purposes only.

The Center is an independent nonprofit organization that does not sell insurance or endorse specific insurance providers.

For further information or assistance, visit www.nonprofitrisk.org.

2. Outsiders

Third parties that have a relationship with the nonprofit may allege harm caused by the

nonprofit and/or its directors, officers or employees. Outside sources can be vendors,

funders, or another nonprofit.

3. The Entity

The nonprofit may bring an action against its directors and officers. Examples include

claims by current management against a former trustee. In some states, derivative suits

are permitted. In a derivative suit, members of a nonprofit may bring a claim on the

nonprofit’s behalf against a director and officer. (Note: Claims by the entity against its

directors and officers are likely to be excluded under most nonprofit D&O policies.)

4. Directors

A nonprofit director may sue another board member alleging violation of a duty owed to

the nonprofit. Under certain circumstances such an action may be compelled (caused by

overwhelming pressure). These claims are likely to be excluded under most nonprofit

D&O policies.

5. Beneficiaries

The people you are in business to help — your service recipients — may bring claims

against directors and officers alleging wrongdoing in the deployment of resources and

personnel.

6. Members

Directors and officers of membership associations are vulnerable to claims brought by

members alleging harm to the interests of the member.

7. Donor

A nonprofit’s corporate, foundation, and individual contributors may sue directors and

officers alleging misuse of a restricted gift.

8. State Attorney General

In most states, the state attorney general represents the interests of the general public in

assuring the proper management of public benefit corporations. As such, the attorney

general may bring a claim against nonprofit directors and officers alleging wrongdoing.

9. Other Government Officials

Other government officials, including representatives of the Internal Revenue Service and

the Department of Labor, may bring actions against nonprofit directors alleging violation

of state or federal laws, for example, the failure to remit employment-related taxes on

salaries paid to employees.

This document is provided for educational purposes only.

The Center is an independent nonprofit organization that does not sell insurance or endorse specific insurance providers.

For further information or assistance, visit www.nonprofitrisk.org.

Choosing a D&O Insurance Policy

Insurance companies write D&O policies in a variety of ways. Some carriers offer a

traditional D&O policies with additional coverages provided through endorsements to

modify coverage for nonprofits. Some policies provide minimal coverages to corporate

directors with substantive exclusions, and the nonprofit coverages are restored through

various endorsements that modify the provisions in the main policy. Another choice for

the nonprofit buyer is designed for nonprofit organizations and provides the essential

coverages. These policies may be called Nonprofit Organization Liability Insurance, Not-

for Profit Organization Professional Liability Insurance, or something similar.

Misconceptions About the D&O Policy

Some board members mistakenly believe that the Nonprofit D&O is their policy, and the

CGL is the policy that covers employees. Actually both policies generally cover the same

people. The major difference is that nonprofit D&O excludes claims alleging bodily

injury and property damage.

Another misconception is that board members are covered for D&O liability under their

homeowners and umbrella policies. It is true that a homeowner’s volunteer activities are

covered under the homeowner’s personal policies, but that coverage is often analogous to

the coverage provided under the commercial general liability policy, not the nonprofit’s

D&O policy.

Nonprofit D&O Claims

The scarcity of nonprofit D&O claims ended in the 1980s with the arrival of employment

practices litigation, which includes claims for discrimination, sexual and racial

harassment, retaliation, and wrongful termination. These claims now account for more

than 85 percent of all nonprofit D&O claims. Other claim trends may also be emerging,

for example claims from donors alleging misuse of funds, from advocacy groups for the

disabled alleging ADA violations, activist district/states attorney general, and from for-

profits alleging unfair trade practices.

Claims against nonprofits remain rare, and many nonprofits report never filing a claim

under D&O coverage. Generally, the larger the organization (in terms of paid

employees), the more likely it is that the nonprofit will someday face an employment-

related complaint or suit.

This document is provided for educational purposes only.

The Center is an independent nonprofit organization that does not sell insurance or endorse specific insurance providers.

For further information or assistance, visit www.nonprofitrisk.org.

Risk Management Strategies

Since the majority of nonprofit D&O claims allege wrongful employment practices, most

risk management tips for this exposure concern employment practices. (For further

information consult Coverage, Claims and Consequences, Second Edition—pgs 137-145)

Tips to minimize the likelihood of a nonemployment D&O claim include:

 Carefully taking and maintaining board minutes that reflect key areas of discussion

and inquisition, board votes (including dissenting votes and abstentions) and action

items. Board minutes should not be verbatim transcripts of the board discussion.

 Exercising care when soliciting and accepting grant funds. Someone in the

organization should carefully review the terms of any grant agreements before the

CEO signs them, in order to make certain the nonprofit is capable of meeting all grant

requirements. Key deadlines should be entered on an office-wide calendar with

someone held accountable for preparing required financial and narrative reports.

 Exercising care when soliciting and accepting donations. In particular, give special

care to any donor-imposed restrictions on the use of funds, and any promises made or

implied in the nonprofit’s fund-raising materials. A growing number of nonprofits are

adopting gift acceptance policies as a risk management tool for fund-raising risks.

 Ensuring diverse board composition and board training—the board should be diverse

in makeup, independent of management, effectively sized and self evaluating. All

board members (and officers), especially new ones, should be well-versed on the

nonprofit’s mission statement. Code of conduction, conflict of interest, ethics and

policy statements should be written, periodically disseminated and acknowledged in

writing by board members and officers.

Employment-Related Claims Are the Majority of Nonprofit D&O

Claims

Informal surveys of insurance companies that write large numbers of nonprofit policies

reveal that a great majority of the claims filed under nonprofit D&O policies allege

wrongful employment practices. Some insurers report that 80-90 percent of nonprofit

D&O claims are actually employment practices claims. Since the greatest D&O exposure

to a nonprofit is an employment-related claim, for many nonprofits, purchasing a D&O

policy that includes coverage for employment-related claims makes good economic

sense.

EPL coverage is also available as a stand-alone policy. The insurance industry developed

EPL insurance for large corporations and followed the for-profit D&O policy model.

Therefore, a separate EPL policy may not provide a nonprofit with the depth of coverage

that a nonprofit D&O with EPL coverage may include. Many stand-alone EPL policies

This document is provided for educational purposes only.

The Center is an independent nonprofit organization that does not sell insurance or endorse specific insurance providers.

For further information or assistance, visit www.nonprofitrisk.org.

do not include the organization, all employees, or volunteers as insureds. The definition

of the covered employment actions may be more narrow than a nonprofit D&O with EPL

coverage. Finally, a stand-alone EPL policy may be more expensive and include a large

retention or possible co-insurance provision where the insured must pay a certain

percentage of the loss.

Purchasing employment practices coverage as part of a D&O policy has one

disadvantage. A blended policy provides coverage for two very distinct exposures with

one policy limit. The inclusion of EPL coverage dilutes the limit of liability (including

defense costs) available to protect the directors’ and officers’ personal assets and to

protect the nonprofit and its employees and volunteers. The defense and resolution of an

employment-related claim will reduce and, possibly exhaust, the D&O policy limits,

thereby leaving limited or no funds for any additional non-EPL claims. The majority of

nonprofit D&O policies provide no separate limit for EPL coverage. However, some

companies are introducing either a sublimit or separate limit for EPL coverage.

Therefore, a nonprofit should carefully evaluate the adequacy of its D&O policy limit

when it purchases D&O that includes employment practices liability coverage. At the

same time, it is important to keep in mind that most nonprofits will never face a

nonemployment related claim, and therefore a D&O policy with employment practices

liability coverage may represent an affordable and appropriate option.