Dr. Earl R. Smith II

By Dr. Earl R. Smith II
DrSmith@Dr-Smith.com
www.Dr-Smith.com

Director and Officer Insurance (D&O) was first introduced to the market to cover directors and officers of for-profit corporations, and unlike general liability insurance standard language is generally not available. The issue of determining what cover is actually provided is a difficult task unless the customer has a basic understanding of the particular language and the specific use is has in the insurance business. There is a wide variety of policies available, but a non-profit organization should look for the following distinctions which make some policies far superior to others. A detailed assessment of individual polices with a trusted insurer will reveal the following coverage distinctions:

o Definition of Insured: “Any natural person who was is or becomes a director, trustee, officer, employee, committee member, or volunteer, as well as the organization itself”. Traditional D&O insurance coverage for for-profit corporations covers only the directors and officers. Some policies on the market still only cover directors and officers; however, the broader definition of the insured is available. A quick way to check is to locate the definition of the ‘Insured’ in the definitions section of the policy in question.
o Defense cost: Most non-profits struggle to raise the money needed to carry out the mission of the organization with little money set aside for a disastrous lawsuit. A non-profit should inspect the section of any D&O policy to determine the policies coverage and method of reimbursement for costs defending the organization and its directors and officers in a lawsuit. Again, a quick check of the definitions section can reveal the definition of the term ‘Loss’. Look for language that requires the insurer to advance the cost of the organization’s legal defense.
o Employment Practices Liability: Non-profits should be aware of the fact that the employees more than by any other ‘group’ are filing litigation against companies and organization. Insurance companies have made coverage changes to limit their exposure to this growing litigation trend. Non-profits with employees should inspect the coverage provided by their D&O policies carefully and be aware of any ‘Exclusions’ which may exist.

Non-profit board of directors should also understand D&O insurance does not replace Errors and Omissions policies or general liability insurance. Many of the ‘Exclusions’ found in each of these types of policies are there because insurance companies expect organizations to have coverage from other types of insurance policies. This ‘café’ approach can allow organizations to pay for the coverage needed in their particular situation; however, the organization must understand their needs and the policy coverage. Often companies employ an insurance advisor or ask a board member with an insurance background to thoroughly review the needs of the company and recommend a company or a policy to fit the needs.

Boards of directors are very good at providing generalized professional management, however most boards are composed of directors with deep knowledge in only one or two disciplines. Outside advisors should provide expertise on matters such as insurance or legal opinions. In many cases, boards with an open leadership style do this. Some boards are reluctant or do not have the financial means to employ outside advisors. Organizations with tight budgets but worthy causes can often ask for and receive pro-bono services from attorneys and insurance agencies. Strong boards of directors with significant influence in the local market will often know whom to turn to for pro-bono advice.

Related Articles:

• Non-profit Board Compensation Practices
• Directors and Officers Insurance
• Errors and Omissions Insurance - Necessary Protection of Officers and Directors
• Non-profit Board Governance Models
• Successful Board Assessment Models
• Nonprofit Governance for Results

Dr. Smith is a proven senior executive, successful entrepreneur, published author and public speaker. He serves on boards of directors and advisory boards or as a strategic advisor to CEOs. Dr. Smith specializes in turnaround management, strategic planning, leadership development and executive coaching. He also works as an executive and/or life coach in the areas of personal growth and spirituality. He is the author of Amazing Pace: Turbo-charged Business Development - a book that shows how Advisory Boards can dramatically increase revenue. Dr. Smith is also the author of Dream Walk: Parables for the Living - a book of Raven Tales and exploration.

This entry was posted on Tuesday, December 2nd, 2008 at 12:30 pm and is filed under Governance. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.