Home » OPINION » Columns » PEYTON SMITH — D&O coverage: board members and officers can’t afford not to have it

PEYTON SMITH — D&O coverage: board members and officers can’t afford not to have it



Most entities and organizations have some type of insurance on board of directors or officers that help run the organization. Some may have a group of employees that are part of their board of directors, while nonprofit organizations usually have volunteers that make up most of their Boards.

Being a member of a board or an officer can be very rewarding, but it can also put you at risk if your organization does not have proper coverage. D&O insurance offers liability coverage from claims that may arise from decisions and actions that are taken within their scope of regular duties. Such insurance typically cover the personal liability of company directors and officers as individuals, but also reimbursement of the insured entity in case it has paid the claim of a third party. It does not matter if it’s a Fortune 500 company, a privately owned company or nonprofit organization, decisions are made by the board or officers that could result in a loss for the company or a third party, and the directors and officers who made those decisions could be held personally liable for those losses.

According to rpsins.com, the following is an example of a directors and officers claim filed against a corporation. “An officer of XYZ Corporation held a conversation with a potential investor in which they discussed the future plans for the company, including the launch of new products over the coming six months. Based on this information, the investor committed over $500,000 to the company. After a year, the products the investor had anticipated did not appear in the marketplace. During this time period, the value of the original investment declined. The investor sued XYZ and its directors and officers for misrepresentation, seeking over $10 million in compensatory and punitive damages. Following two years of litigation and $250,000 in defense costs, the parties finally reached a settled with the plaintiff for $335,000.” In this example, the company is held liable because the investor had put a substantial amount of money on the line because he was under the impression that the new products were going to be developed in the next six months and a return on the investment would be made. Forms and coverages vary from one insurance company to another, so it’s very important to know what is included in your policy.

Individuals that serve on a nonprofit Board have similar duties and risks  as those serving on the Board of a for profit company.. In fact, individuals serving on a Non Profit Board could be more at risk because the organization may not have the money or resources to respond in the event of a D&O claim.  According to lms.ca/@pdf/alz-dando.pdf, one example of a nonprofit directors and officers claim is “A holiday parade in a major metropolitan city is sued by a spectator after one of the volunteer performers tossed a free gift into the crowd, injuring the plaintiff. Although direct damages resulting from the bodily injury may have indemnity under the commercial general liability policy form, the plaintiff is suing for financial damages of $200,000 from the directors and officers alleging inadequate safety protocol and training procedures. Defense costs are accumulating and expected to be significant.” This is a good example of some of the risk associated with serving on a nonprofit board, but once again it’s important to know exactly what your specific policy covers.

In the two examples above not only are the companies and organizations being sued, but the directors and officers are also being held liable since they were the ones that made the decisions. If the companies and organizations in the above paragraphs don’t have proper directors and officers coverage, then the board members could be paying a substantial amount of money out of pocket or during litigation.

Regardless of the type of board that you are a member or officer of, it is very important to make sure that you have adequate Directors and Officers Insurance coverage. It would be very unfortunate to have to pay a substantial amount of money out of pocket if the company or organization that you are board member of does not have the proper insurance to cover you.

» Peyton Smith  is a risk adviser with SouthGroup insurance and can be reached at peyton.smith@southgroup.net or 601-326-5312.


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