Skip Ribbon Commands
Skip to main content
S1-Post-Only

Nonrenewal of D&O Liability Insurance - Are Directors and Officers Still Covered?

BIGI_logo_askExpert.pngThis question was posted to our Ask an Expert Service, a members' only benefit of the Big "I" national which is staffed by more than 50 volunteer industry experts:

Recently the board of directors for a statewide landlord association, of which I am a part, decided not to renew their directors and officers (D&O) liability insurance. They cited my state's nonprofit corporation act as the basis for their decision stating that the act provided protection to board members based on this provision:

"No director shall be personally liable to the Association for monetary damages for breach of fiduciary duty as a director except for (i) a breach of the director's duty of loyalty to the Association; (ii) acts or omissions not in good faith or which involve intentional misconduct or knowing violation of the law; (iii) any transaction from which the director derives an improper personal benefit; or (iv) as further defined in [State code section omitted]."

Does this mean D&O insurance for non-profits in this is no longer needed, or does it just greatly reduce the risk? 

Big "I" VU Faculty Responses:

You will notice all of the "excepts" which means coverage is still very needed. Also, people can still be sued for many things and will need defense to show why they are not responsible.

==============================================================================

They should ask their corporate lawyers since this requires legal advice.

==============================================================================

I don't see that it reduced anything. It addresses liability TO the association, not to third parties who might sue them.

==============================================================================

If someone sues the board member where are they going to get their defense?  Ok, maybe the law helps them but who's paying for the attorneys going to court to prove that the claim is barred, if it is barred?

Remember insurance premium are KNOWN, defense cost and judgements are UNKNOWN, most would rather pay the known premiums so they don't have to worry about the unknown.

==============================================================================

What if you get sued?  Who's paying for the attorney to defend the Ds and Os?

==============================================================================

Look who they are NOT personally liable to – the association. It doesn't say anything about others.

Further, it's only for fiduciary duty – not acts or decisions.

I think that was a bad decision on the board's part.

==============================================================================

I think the board should maintain its coverage for several reasons. Our business is based on the re-interpretation of legal tenants, that in theory are codified by the legislature that their actions and or inactions have been deemed not responsible for such causation as not being recoverable.

I especially appreciate the sentence "knowing violation of the law". That obviously eliminates the theory that ignorance is no defense under the law. If you knowingly violate the law does that not make you guilty of some other codified section of the law but damages still will inure itself to the plaintiff. Will that theory withstand the upcoming legal challenges by denying the right to recourse of civil actions not specifically addressed in the law?

One must presume that because the legislature has so deemed that no recourse exists until the law is overturned by the state or federal court of appeals. If that does occur and the action is returned to lower court to be adjudicated and now that law has been overturned thereby relieve the defendant of protection from the litigant or parties to the litigant.

If your BOD is willing to have each member of the BOD sign waivers of indemnity in perpetuity from any and all future or previous litigation you may have a leg to rest upon.

I would advise in a most positive method explain to your client how often laws are reversed or amended.

The first 5 hours of billed time in 15 minute increments will have easily covered the cost of the premium proposed. Now think of your own E & O issue for the reasons in a very short response to your question.

==============================================================================

Like most Volunteer Protection Acts the directors are not held labile. However, the laws do not prevent a suit from being filed. If a suit is brought a court may have to determine if the law applies to the allegations. If you don't have D&O who will be paying for the defense? Substantial funds may be required to defend against even a frivolous claim.  Are you ready to put up your own personal funds since there is no coverage for you under personal insurance policies for the types of claims that arising out of board service?

Even though some umbrellas have an exception for service on a not-for-profit board the umbrella responds to BI and PD claims. That is not what director suits deal with. 

Does the organization have the funds to pay for the defense?  Also, the law provides protection for the directors only; you didn't indicate if the previous policy provided any protection for the entity.  If it was also covered under the previous D&O policy, where does the organization now have protection if the claim is against them alone or in conjunction with the board? 

Since the 80's the majority of claims against not-for-profits has been employment practice claims. Do they have separate coverage?  Did they have the EPL coverage as part of the expired D&O?

==============================================================================

It's a question that requires input from a lawyer because it requires a comparison of the "protection" provided by the statute and the coverage provided by the insurance. Without attempting that comparison (because I'm not a lawyer and because I haven't got time to do it) I'm 100% certain that the statute provides some of the same protection as the D&O policy; but I'm equally certain that the statute doesn't perfectly duplicate the D&O coverage.  In other words, there are things that can happen that are not covered by the statutes but ARE covered by your D&O policy.  Making that determination, however, is not agent work, it's lawyer work, and if you get it wrong, you'll either be accused of practicing law without a license or you'll be sued for an E&O.

==============================================================================

This is a legal question that should be answered by the Association's attorney. That being said, note the statute applies only to personal liability of the individual directors. The entity is not provided protection by this statute. If the entity has no assets coverage may not be a big deal, or it may be.  Once again, legal advice needed here.

Also, any fool can sue - without a D&O policy, there is no defense coverage for the individual directors to pay for a defense against aforesaid fool.

As an aside, I would note that some personal umbrella policies cover insureds who sit on nonprofit boards but only for the perils covered by the personal umbrella (typically BI, PD, and PI), so PUP coverage may not be adequate.

==============================================================================

As a non-attorney, my reading of that statute focuses on the text pertaining to "breach of fiduciary duty." The actual fiduciary duty may be small. Yet, the possibility of miscellaneous errors and omissions as a director may be high. D&O coverage is still needed. Beyond the exceptions (i) through (iv) can still happen, in which case the entity coverage may be necessary, although the individual indemnification of the director responsible may evaporate.

Last Updated:  August 19, 2020
image 
​127 South Peyton Street
Alexandria VA 22314
​phone: 800.221.7917
fax: 703.683.7556
email: info@iiaba.net

Follow Us!

Empowering Trusted Choice®
Independent Insurance Agents.​