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You were elected to the board of directors? Gee, that’s … um … p2

Wed Nov 12th, 2014 on     Insurance Law,    

Power and responsibility may come at a price: liability. Serving on the board of directors or as an officer of a for-profit or nonprofit organization may be lucrative or rewarding or both, but the positions also carry risk for the individual. Think about Enron: When the company imploded, officers and directors scrambled to prepare for lawsuits and criminal charges against them personally and as a group, even if they knew they had done nothing wrong.

It is an extreme example, but it makes the point that an officer or board that makes bad decisions that affect an organization and its stakeholders can be held personally responsible. And personal responsibility can be expensive.

The answer for most organizations is to purchase directors and officers liability insurance. The organization pays the premiums and indemnifies the leadership team, shielding them from having to dip into their own assets to defend and pay claims against them.

D&O coverage is much like professional malpractice and errors and omissions coverage. Where commercial general liability covers personal injury (premises liability) and property damage, D&O covers financial losses resulting from mismanagement.

We have talked about the duty to defend and the duty to indemnify. The D&O insurer has the same duties — for the most part — but handles the costs differently. When an insurance company defends a premises liability claim, the defense costs are managed separately from the policy limit. In an E&O policy, the defense costs and policy limit are blended.

How on earth does that work? We’ll explain in our next post.

Source: IRMI, “Glossary of Insurance and Risk Management Terms: Directors and officers liability insurance,” accessed Nov. 6, 2014

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