I have been asked to serve on the board of a prominent and prestigious organization. What kind of liability protection do I need?
First, congratulations on your appointment! We're glad you asked this question because serving on a board of directors presents a number of liability exposures for the individual. You don't want your personal assets exposed to lawsuits arising out of your service.
Corporate directors can be sued individually for acts they perform (or fail to perform) or decisions they make while serving. If someone alleges the corporate leadership harmed the organization or another individual in the course of managing financial affairs or establishing policies, the resulting legal fees and potential judgments or settlements can devastate the organization as well as the individuals.
For example, a stockholder of a corporation or a member of a charitable or non-profit organization may allege financial loss as a result of a director's breach of the duty of care or loyalty to the organization. Employees, governmental entities, competitors, or creditors may allege negligence or some other breach of duty.
Organizations that depend on independent directors for leadership would have a difficult time convincing individuals to serve in those positions without some method of protecting their personal assets from such claims. Directors and Officers (D&O) Liability insurance policies were developed to protect organizations and their directors and officers against these potential losses.
If you serve as an independent director of a corporate entity – whether it is for-profit or non-profit – you are likely covered by a D&O liability insurance policy purchased by the entity for the benefit of the organization as well as the individual officers and directors. Before agreeing to serve – or continuing to serve – as an independent director, request details about the D&O policy the organization has purchased. Ask for a copy of the policy and read it. A careful reading should convince you that the corporate D&O policy does not provide the complete protection needed to protect your assets.
Independent directors should consider purchasing an Independent Directors Liability insurance policy as a liability safety net and not rely solely on D&O liability policies purchased by the organization.
There are several reasons the organization's D&O policy should not be the end of your search for adequate protection. Consider these points carefully.
Limits of liability. The limits of liability on the D&O policy belong to all covered persons and entities combined, and they apply to all claims during the policy period, including defense costs incurred to defend those claims. When the limits have been exhausted by payment of defense costs, settlements or judgments related to one or more claims during the policy period, there is nothing left for any subsequent claims.
Exclusions. The exclusions found in a D&O policy can have a profound effect on the scope of coverage provided by the policy. The typical policy contains the following exclusions:
- Insured versus insured: The policy may exclude claims brought by one director against another director, or by the organization against a director.
- Failure to Maintain Insurance: The policy may exclude the consequences of board decisions regarding insurance. If a property or liability insurance policy proves to be inadequate to cover a loss to the organization, the D&O policy will generally not cover a claim against the organization or its directors that they failed to purchase adequate insurance coverage to protect the organization's assets.
Application warranties and policy conditions. The D&O policy can be rescinded after a claim is reported if the application for the policy contained false or misleading information. A claim may be denied if the claim is not reported to the insurance company in a timely manner.
Cancellation. The D&O policy can be canceled for a number of reasons without the director's knowledge, including cancellation for non-payment, change of control or change of risk.
Independent Directors Liability Insurance
When you purchase an Independent Directors Liability (IDL) insurance policy, these concerns are addressed by providing coverage and limits dedicated to only one director – you.
The typical IDL policy protects you with the following important features.
Dedicated Limits of Liability. The limits of liability on your IDL policy belong only to you – the independent director named on the policy. If the corporate D&O policy limits are exhausted due to claim expenses, judgments or settlements, your IDL policy steps in and takes over on your behalf.
Non-Rescindable and Non-Cancellable. The IDL policy can't be canceled or rescinded except for non-payment of the premium. If the D&O policy is canceled or rescinded, the IDL policy drops down to protect you.
Fewer Coverage Exclusions. The IDL policy is unencumbered by the large number of exclusions that are necessarily found in the typical D&O policy. In other words, the IDL policy does not "follow form" with the corporate D&O policy.
Portable. The IDL policy can cover your service on more than one board if you elect to do so. In addition, it can cover your past service on boards, should a claim arise after you leave that board.
Shadow Defense Coverage. When a suit is filed against the corporation and/or a number of directors, the defense counsel appointed by the D&O insurance company is responsible for representing the potentially diverse interests of all defendants. When you report the claim under your IDL policy, the IDL insurance company may appoint an attorney to monitor the proceedings to be sure your individual interests are protected.
The points listed above are some of the major benefits of purchasing an IDL policy. IDL policies are available from a number of different insurers, but these policies have different terms and conditions and must be reviewed carefully to determine how they suit the needs of a prospective purchaser.
Some organizations agree to procure and pay for IDL policies for their independent directors, but a policy obtained in this manner may not be the best policy for you.
Contact your agent for more information.
This article was prepared and made available to your agent by the Independent Insurance Agents of Texas, which is solely responsible for its content. Please read your insurance policy. If there is any conflict between the information in this article and the actual terms and conditions of your policy, the terms and conditions of your policy will apply. The Independent Insurance Agents of Texas is a non-profit association of more than 1,500 insurance agencies in Texas, dedicated to helping its members succeed, in part by providing technical resources that explain insurance policies sold to their customers.
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