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BOARD OF DIRECTORS INSURANCE
It is an honor to be asked to serve on a board of directors. It means the leadership of the organization has confidence in you. However, you need to be aware of your responsibilities. Once you have accepted a board position, you also accepted the three legal duties, of obedience, loyalty and care. The simplified descriptions of the duties are: The duty of obedience means you must act within your authority and within the law. The duty of loyalty means you shall act in the best interest of the entity and not toward your best interest. And the duty of care refers to you must act with due diligence and care in a manner that is in the best interest of the entity.
Examples of violating these duties include:
- Hospital officers held responsible for Medicare fraud and abuse.
- Bank directors held liable for loans made in excess of mandated limits.
- Gaining undisclosed or unfair profits through personal transactions with the entity.
- Performing inadequate testing on a new product before putting it on the market.
- Allowing a prospectus that contained known errors to be distributed.
If you get sued as a board member for violating your legal duties, where do you have protection? Generally your homeowner’s, personal umbrella, commercial general liability, business auto, employer’s liability and professional liability policies will have your exposure excluded or have severe limitations.
Hopefully the entity has directors & officer’s liability insurance. In fact, all entities that are governed by a board of directors should have directors & officer’s liability insurance.
As the policy’s name implies, this is a liability policy. The directors can do everything right, but still get sued. As a result, one of the biggest reasons why you get liability insurance is to provide you with a legal defense.
There are varying forms of D&O policy forms, but the following is a list of items to check:
Make sure who is insured is correct. It amazes me how many times on business insurance policies, I’ve seen this botched. So if your entity is a corporation, be sure every director that is listed by the bylaws is included.
Every D&O policy will have a self-insured retention or retention. These terms are another way of saying deductible. Generally you will have two deductibles, one per person and one for the total or aggregate limit. Adjusting your retention amounts is a great way to maintain coverage and stay within your budget.
Each D&O insurance company will have a minimum premium. A minimum premium is the least amount of premium an insurance company will accept a client. If you have a small corporation or non-profit, a $1,000 minimum premium is normal. If you can’t find a lower minimum premium, maximize your coverage and limits. For instance you may be able to lower the retention to the lowest, increase your coverage limit or add coverage such as employment practices liability without increasing the final premium. All I’m saying is get the best bang for your buck.
Some forms will only provide coverage for defense costs. Try to get a form that pays for damages as well.
When deciding on a coverage limit, be aware that a D&O policy is different than most other liability policies. In a D&O liability policy your defense cost are taken out of your limit.
Your liability policies that you are most familiar with are probably “occurrence” forms, which means the time the claim occurred determines which year’s policy will respond. The Directors & Officers’ liability policy is a “claims-made” policy, which means when the claim is first reported triggers the coverage. For example, something unknown occurs in January 2011and in March 2013 the entity is served with suit papers. The policy that has the March 2013 date within its effective dates is the policy that responds.
“Claims-made” policies have a retro date. The retro date is how far back in time an insurance company will consider covering. Try to get full prior acts coverage.
If an entity wants to get savvy directors, you need a directors and officers’ liability policy. Don’t you want to protect them from a lawsuit?
If you would like additional info, contact us at your convenience. We’ll be glad to assist you.