This coverage, which often provides some protection for the company too, is sometimes sold as a standalone policy but is often included in more comprehensive executive risk policies that include other coverages, such as employment practices liability insurance, fiduciary or employee benefits liability, and crime.
Risk managers at many small or midsize privately held companies or nonprofit organizations may not believe they need D&O insurance. However, directors and officers at any organization that has a board of directors or advisory committee could face lawsuits when making decisions on behalf of the organization. These organizations should at least consider purchasing a D&O policy.
A company or nonprofit that does not have coverage may not be able to attract qualified directors and officers because they may be unwilling to put their own assets, or those of their spouse or estate, at risk. Even when an organization’s bylaws provide indemnification for its directors and officers, there are situations in which the organization may be unable or unwilling to do so. As with other types of potential civil exposures, even when the allegations made are frivolous or without merit, the cost to pay an attorney to defend a lawsuit can be expensive.
Exposures faced by directors and officers at privately held companies include allegations of misrepresentation, breach of fiduciary duty, lack of corporate governance, inadequate or inaccurate disclosure in financial statements, and failure to meet regulatory standards. Privately held companies that elect not to purchase D&O insurance to protect themselves and their directors and officers will need to do so when they sell the business or attract additional investors.
The company’s directors and officers must also be protected in case they are sued after a deal closes and the purchasers or investors must ensure that their investment, as well as their own personal assets should they join the board, are protected. Costly lawsuits are quite common following any merger or acquisition resulting from disputes over valuation, corporate strategy or due diligence.
What about nonprofits? Directors and officers of nonprofit organizations, such as charitable foundations, cultural organizations and trade groups, face similar types of exposures as those at privately held companies, including mismanagement of funds, neglect or dereliction of duties, or conflicts of interest and self-dealing. However, these individuals often do not have as much experience serving in those capacities and may not understand their duties and responsibilities under the law, potentially creating a higher risk of a claim against them.
Also, nonprofits often rely on volunteers, which further increases the risk of breaches of duty. Often D&O policies for nonprofits extend not just to the directors and officers but also to employees, volunteers and other third parties.
Unfortunately, many nonprofits believe that their budgets are too tight to be able to afford D&O insurance. However, the premium for a policy pales in comparison to the cost to pay an attorney to defend the company, director or officer and resolve a claim.
In the past, D&O coverage for condominium board members may have been an afterthought. However, events like the collapse of the Champlain Towers condominium in Surfside, Florida, in 2021 highlighted the potential scrutiny that board members could face should a tragedy occur.
This may include the decisions a condo board made about building maintenance, structural inspections, the amount and types of property and liability insurance they buy, maintaining adequate and appropriate reserve funds, and their analysis of risk management procedures. Boards have a fiduciary responsibility to see that proper repairs are done while also facing pressure from unit owners to keep assessments and fees low, which is a dangerous balancing act.
The insuring agreements of most D&O policies are quite broad, but the coverage provided is typically limited by several exclusions. The details of the terms and conditions of the coverage provided may vary significantly from insurer to insurer. The coverage is also usually written on a claims-made basis and any independent agent or broker selling D&O coverage to companies or nonprofit organizations should read the policies carefully to ensure that they understand the coverages and limitations being offered, as well as the reporting requirements.
How is all this relevant to you? Most agents and brokers deal with businesses or nonprofits that would benefit from D&O coverage. Granted, there are only a few states that impose a “duty to advise” but even so-called order-taker states typically allow plaintiffs to argue that a “special relationship”—formed by contract, your representations or past dealings—exists between you and your client.
That’s why over the last decade we’ve seen dozens of E&O claims against insurance professionals that involve D&O coverages. Loss payouts have ranged from $20,000 to more than $1 million. Others were closed with no loss payment, but even in those cases, there can be a considerable cost to the agent’s record and reputation.
The solution: Even if you don’t recommend the coverage, there is a potential benefit to both you and your client if you offer the coverage and promptly follow up by either getting a quote or recording the response.
Still, failure to recommend D&O is only part of the problem agents face—13% of it in Swiss Re’s experience. The most common errors—27%—are claims related. Another 13% stem from policy issuance, 11% involve applications and 8% arise from policy changes. The remaining 30% are spread between errors with respect to risk assessment, policy replacement, premiums, renewals, policy interpretation, policy cancellation and binders.
Directors and officers have great power to direct the organizations they serve. But with that power comes great responsibility to meet certain standards and comply with various duties. If they do not meet those standards or comply with those duties, or are even accused, they and their family’s personal assets are at great risk.
John Nesbitt is vice president and claims expert with Swiss Re Corporate Solutions and works out of the Kansas City office. Insurance products underwritten by Swiss Re Corporate Solutions America Insurance Corporation, Kansas City, Missouri, a member of Swiss Re Corporate Solutions.
This article is intended to be used for general informational purposes only and is not to be relied upon or used for any particular purpose. Swiss Re shall not be held responsible in any way for, and specifically disclaims any liability arising out of or in any way connected to, reliance on or use of any of the information contained or referenced in this article. The information contained or referenced in this article is not intended to constitute and should not be considered legal, accounting or professional advice, nor shall it serve as a substitute for the recipient obtaining such advice. The views expressed in this article do not necessarily represent the views of the Swiss Re Group (“Swiss Re”) and/or its subsidiaries and/or management and/or shareholders.
Copyright © 2023, Big I Advantage®, Inc. All rights reserved. No part of this material may be used or reproduced in any manner without the prior written permission from Big I Advantage®. For permission or further information, contact Agency E&O Risk Manager, 127 South Peyton Street, Alexandria, VA 22314 or email at info@iiaba.net.
