Directors & Officers: What is it?

What does directors and officers (D&O) liability cover?
D&O insurance is designed to protect the organization, its board members and other "insured's" from claims alleging mismanagement or misgovernance of the organization. Most policies do not list specific types of covered claims. Instead, they cover "wrongful acts," a term that may be very broadly defined. The definition of a wrongful act may include actual and alleged acts, errors, and omissions, misleading statements, and neglect or breach of duty. Coverage is then narrowed down by a list of limitations and exclusions. Some exclusions bar coverage for exposures addressed in other insurance policies (such as bodily injury or professional liability), while other exclusions bar exposures that are uninsurable as a matter of public policy (such as illegal or dishonest conduct).

Most nonprofit D&O policies will include coverage for employment practices liability. This coverage will typically include protection for claims arising from employees for discrimination, wrongful termination, or sexual harassment.

Board members, especially wealthier individuals and attorneys, will require D&O insurance as a condition of sitting on a nonprofit board. Their concern is valid. Beyond the organization's ability to indemnify them individually, their personal assets are at stake.

What are the responsibilities of a board member?
Officers and Directors owe three basic fiduciary duties to a nonprofit organization:

1. Duty of Care: Directors and Officers need to be diligent and prudent in managing the organization's affairs. The individuals charged with governing must handle organizational duties with such care as a prudent person would use under similar circumstances. Board members need to make sure organization assets are not wasted or improperly invested and provide proper oversight of the organization.
2. Duty of Loyalty: Officers and Directors must act in good faith and must not allow their personal interests to prevail over the interests of the organization. Officers and directors must avoid any kind of self-dealing or conflict of interest, especially when providing goods or services to the Agency for a fee or commission.
3. Duty of Obedience: The governing board of the organization must comply with state and federal laws, and conform to the organization's charter, articles, and bylaws. Board members must make sure the organization is managed free of conflicts of interest, that the member's rights are protected, and the organization's purpose is fulfilled.

Does the Volunteer Protection Act of 1997 protect nonprofit board members from being sued?
Federal legislation, known as the Volunteer Protection Act of 1997, was signed into law by President Clinton on June 19, 1997. Although this law has good intent, a volunteer, to receive protection must prove in a court of law that her or she:

• Is acting within the scope of his or her responsibilities
• Did not cause the harm by willful, criminal, or reckless conduct or gross negligence
• If appropriate or required, was properly licensed or certified
• Did not cause the harm by operating a motor vehicle, vessel, or aircraft

Can I find protection for D&O under my homeowner's policy?
It is possible that some limited coverage for board service may be found under an individual's homeowners policy. Coverage may respond to allegations based on bodily injury or property damage liability for your activities as a volunteer or board member; however, coverage may be limited, nonexistent, or silent for activities related to mismanagement or governance of an organization.