D&O Insurance 101
What Should Your Directors and Officers Policy Cover?

Before you purchase a Directors and Officers Insurance policy for your nonprofit, be sure you know exactly what you’re getting. You don’t want to wait until a lawsuit hits only to find that your policy doesn’t have the coverage you need. But what should it cover?

Primarily, your D&O Insurance protects your board members and officers when they are personally liable for the work they do for your nonprofit. But because lawsuits can come from various sources and be triggered for different reasons, you’ll need to read the policy’s fine print to ensure the most pressing risks are addressed.

Don’t be intimidated, though. Here, we’ll review what your policy should cover, depending on your needs. And if you still have questions about the coverage, don’t hesitate to ask your agent.

D&O Policy Benefits

If you’re not sure whether you need a D&O policy, read "When Does a Nonprofit Need D&O Insurance?" As a general rule, if you have a board, you should have this policy in place.

The policy can help pay for:

  • Legal defense fees.
  • Judgments and settlements.
  • Other court costs.

By providing these benefits, the nonprofit’s directors and officers don’t have to use their personal assets to fight a lawsuit. Rather, the insurance policy can cover their legal expenses. That’s why potential board members might require you to carry this coverage before they sign on. (For more on that, read "Why Your Board Might Demand You Carry D&O Insurance.")

When deciding on a particular D&O policy, you want to consider its limits and make sure they are high enough to cover your board. Your agent can help you figure out an appropriate amount.

Another thing to consider: some policies cover the nonprofit entity if it’s sued. Again, it’s something to ask your agent about.

Keep in mind that these benefits usually apply until a board member is found guilty of criminal wrongdoing. In this case, the board member might be fully responsible for all legal costs, depending on the policy. Be sure that the policy covers innocent directors, even if their colleague is found guilty. They’ll be grateful for the coverage, which can be invaluable in getting your organization back on track.

Lawsuits D&O Can Address

There are many different kinds of lawsuits your board members may face, so you should have an understanding of which ones your D&O policy can and can’t cover. The most common types of D&O lawsuits come from…

  • Employees.
  • Ex-employees.
  • Customers.
  • Creditors.
  • Lenders.
  • Investors.

These parties may allege that certain board members…

  • Misused the organization’s funds.
  • Wrongfully terminated employees.
  • Discriminated against employees.
  • Committed fraud.
  • Misrepresented the organization’s assets.

For perspective, almost 73 percent of D&O claims against nonprofits in the past 10 years were employment-related, according to a report by Towers Watson New browser window icon., so you definitely want your policy to cover those types of claims. In fact, your D&O policy should cover a variety of claims related to your board members’ duties, such as managing funds and employees.

Again, your insurance agent is your most valuable resource when it comes to understanding your D&O policy and finding adequate protection. With the proper coverage, your board members can make decisions without the anvil of worry hanging over their heads. It’s a good way to attract and keep the best and brightest minds working for your cause.

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