What does a Directors & Officers [D&O] Liability Insurance Policy Cover?

Standard General Liability policies provide coverage for bodily injury and property damage. It does not provide protection against “wrongful acts.” This includes allegations of failing to make a prudent decision, bad management practices and unfair employment practices. Directors and Officers Liability Insurance provides coverage for this exposure. This is basically management insurance. It provides protection to the board members for the decisions they make on behalf of the organization.

Coverage provided by a D&O policy is not universal. It is important to pay attention to the policy wording to be sure the coverage meets your needs.

"Wrongful Acts" vs. Bodily Injury

The difference between bodily injury and a “wrongful act” is highlighted in the following example:

During a board meeting one of the board members brings up the fact that a high traffic hallway carpet is beginning to come apart and presents a trip and fall hazard. After some discussion, the board decides that the carpet will not be replaced until the next fiscal year. Two weeks later an elderly visitor to the building trips over the carpet and breaks her hip. She consults a lawyer and sues the organization for her injury. The lawyer reads through the minutes from the previous board meeting and finds that this safety hazard was brought to the attention of the board and was not acted upon by the board members. The claimant then also sues the board members individually for failing to make a prudent decision.

The General Liability coverage would cover the organization and the board members for the bodily injury suit. It would not provide coverage for the suit against individual board members claiming they failed to make a prudent decision. This would require a D&O policy.

Examples of D&O claims made against board members include accusations of acting outside their authority granted by the bylaws, making decisions that put their personal interests ahead of the organization’s goals or grossly mismanaging the organization’s funds. The most common claims are those alleging unfair employment practices. This can include an ex-employee claiming that they were fired for turning in a workers compensation claim or for turning down their supervisor’s sexual advances.

North Carolina does have statues that make it more difficult to win judgments against non-profit organizations. Non-profits are typically not held to as high of standards as regular corporations. This makes it more difficult to win in a lawsuit against a non-profit, but it does not make it more difficult to sue the non-profit. The board must still prove that they acted properly and defense costs alone can be tens or hundreds of thousands. This cost would be taken care of by a D&O policy.