Directors and Officers Liability Insurance
Do all nonprofit
organizations need Directors and Officers Liability Insurance?
The following article
is a summary of an NPCC workshop on the topic of whether or not an organization
should carry Directors and Officers (D&O) insurance and what the
NPCC plan offers. NPCC members can obtain a low-cost comprehensive policy
through a program administered by Crystal Financial Services and
underwritten by National Union Insurance. NPCC's past president, Peter
Swords has been involved with the issue of D&O liability insurance,
and led this session.
Unlike general liability
insurance -- which any organization that has a physical plant would
be foolish not to have -- many nonprofits are uncertain whether they
need D&O coverage. When a person becomes a board member of a nonprofit
organization, she assumes a level of responsibility for the organization
("duty of care"), and exposes herself to claims for not running
and managing it in a proper way. Whether or not your organization needs
D&O insurance depends on what the likelihood is that one of your
board members will be the target of such a claim.
fall into two categories: bodily injury (physical harm) and non-bodily
injury (non-physical harm, like discrimination or termination). The
majority of claims are for bodily injury. Your general liability insurance
covers board members, subject to policy terms and conditions, for claims
arising out of bodily injury and property damage.
Officers liability insurance only covers non-bodily injury claims. Non-bodily
claims include employment-related claims and mismanagement of funds.
Fear of non-bodily
injury lawsuits would be one reason to have D&O insurance. Although
there are very few reported cases, it doesn't mean that claims have
not been filed and then either settled out of court or dropped.
are two types of lawsuits in which a claim might be brought against
a board member: derivative lawsuits and direct or third-party lawsuits.
are claims against a board member on behalf of the corporation. The
typical claim here would be mismanagement of assets. But, under New
York State law only a few people have "standing" or the right
to bring such claims. They are: 1) board member(s) suing other board
member(s) 2) members of an organization suing a board (if at least 5%
of the total membership join the lawsuit), and 3) the state Attorney
Because of these
restrictive standing rules, very few derivative claims are ever made.
It should be noted that claims of these types are not made for awards
to an individual, but rather to make the corporation "whole."
Direct or third-party
lawsuits are brought by an employee or by a person not connected
with the corporation who asserts a claim against it or its board on
account of some non-bodily injury.
like termination and discrimination are the largest exposure in these
types of claims. If you have a small, friendly staff, and feel unlikely
to have employment claims resulting in a lawsuit, you might not think
it necessary to carry D&O insurance. However, when employees feel
they have been wronged and are angry, they may file a claim even if
it is baseless. At that point, you will have to hire lawyers. Your D&O
then becomes a legal defense policy.
view is that D&O insurance is essentially legal defense insurance,
noting that "99.99% of the cases brought against a board are going
to be thrown out, but you're still going to have to pay the legal fees
if a claim is filed."
In this connection,
the "deep pocket" theory is relevant. This theory holds that
only people with money are likely to be sued. Lawyers may file a suit
based on a bogus claim against "deep pocket" board members
with the hope of securing a settlement for their client. Organizations
that have a board made up of "ordinary" people who aren't
known to have vast amounts of money may then be comfortable without
If an organization
decides that it needs D&O insurance, they should be aware that D&O
policies vary greatly, unlike general liability policies which are somewhat
standard. Some policies are exorbitantly expensive and often have serious
coverage limitations. When shopping for a policy there are three major
items to keep foremost in mind: who is covered and who is not; what
types of lawsuits are excluded from coverage; and what is the rating
and payment history of the underwriter.
Who is covered?
All policies, obviously, include an organization's directors and officers.
Officers include the executive director and possibly a few "key"
employees. However, many policies don't include staff and volunteers
or the entity itself. If a claim is filed against a board member, in
many cases it will also be filed against the nonprofit. Furthermore,
many nonprofits have volunteers other than board members serving on
What is excluded?
When purchasing D&O insurance be aware of what is not included.
Many D&O policies
exclude employment related claims (which are the majority of claims
brought against a board) and non-pecuniary actions. A non-pecuniary,
or non-monetary claim, is one where a plaintiff is not asking for monetary
damages, but is ideological in nature, i.e.: a suit against the board
for not fulfilling its mission. These types of suits, although rare,
are usually lengthy and costly in legal fees.
Be sure to investigate
the insurance underwriter, the financial integrity of that company,
and whether they are admitted into New York State (so that in the event
that they fail they will be covered by the State fund). Find out what
the rating of the company is; never sign on with a company whose rating
is less than "A.". A.M. Best & Co. and Standard &
Poor are two of the larger companies who provide underwriter ratings.
Also, determine whether the company has a good record of claims payments
by asking your broker or agent to show you how it is viewed by the rating
you feel that your organization needs D&O insurance, you should
explore NPCC's program with Crystal & Co., Inc. The underwriter,
Hiscox Insurance Company Inc., is rated A, XII (Excellent) by A.M. Best and is well capitalized with domestic reserves between $1-$1.25 billion. The Hiscox NPCC insurance product has been fully approved by the New York State Insurance Department of Financial Services.
policy is an association plan, meaning that directors and officers,
all staff, volunteers, and the association itself are covered for $1
million. Premiums for limits greater than $1 million are still available.
The policy is administered by Crystal & Co., Inc.
NPCC plan also covers claims for personal injury, like libel and slander.
It covers claims for published material, copyright infringement and
plagiarism, employee related claims, and non-pecuniary lawsuits.
costs generally begin at $1,000-$1,500 for $1,000,000 limit of liability coverage for one
year (effective May 2013). Incremental increases in premiums will apply
as the size of the organization increases and some organizations, including
educational institutions, those involved in giving legal advice and
health care-related organizations, will now fall outside the program
parameters and will be underwritten individually. While some groups
may no longer qualify for minimum pricing, NPCC and the representatives
at Crystal & Co., the program administrator, believe that
the coverage afforded by NPCC's D&O policy continues to provide
an exceptional level of coverage at a very reasonable price.
The policy has also
been enhanced with the following enhancements: CrisisFund for Non-Profits
Endorsement offers coverage for the organization in order to mitigate
a potential loss as a result of the publication of unfavorable information
regarding the organization; and Subsidiary Coverage Endorsement offers
automatic coverage for any nonprofit and for-profit subsidiaries (subject
to asset thresholds).
The Self Insured
Retention (somewhat akin to a deductible) is $100 per board member,
with a $1,500 cap. If a lawsuit was brought against the organization,
the S.I.R. is based on the organization's assets, and is between $1,500
up to $5,000.
Any 501(c)(3) organization
in good standing as an NPCC member is eligible to enroll, regardless
of age or size of the organization. There is no limit to the number
of NPCC members who can enroll.
If you would like
more information about the D&O plan, contact
Robert Panza at Crystal & Compay at 646-810-3468
or Robert.Panza@crystalco.com. Or, contact Danielle Penabad at NPCC at 212-502-4191, extension 230 or firstname.lastname@example.org.
2003 Nonprofit Coordinating Committee of New York, Inc. www.npccny.org