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Understanding D & O insurance.

With its special terms of coverage, board insurance stands alone.

Many states have changed their laws in the last few years to shield board members from lawsuits based on personal negligence. Despite the good intentions of their sponsors, however, these laws do not fully achieve their aim.

Significant exceptions are the norm, and none eliminate liability under federal law. Because most of the claims against association boards of directors allege labor law infractions, antitrust violations, or discrimination, the new statutes have not substantially reduced board members' personal vulnerability to suit.

Insurance designed especially for boards is commonly referred to as D & O insurance. Directors and officers liability insurance can offer additional protection for board members' personal assets and may also be advisable to protect the association's property. Claimants typically sue the association as well as or instead of directors and officers. They may also sue staff and volunteers other than board members for acts that could be covered by insurance especially designed for boards.

D & O insurance encompasses a variety of policies with substantial differences. Some cover claims against the association and volunteers, as well as the board. Moreover, D & O insurance does not cover all varieties of claims against board members.

Common misunderstandings

The decision to purchase D & O insurance may be influenced by misunderstandings about other types of protection. For example, a general liability policy can provide coverage for an association's board, but the coverage is not the same as what a D & O policy provides. The standard general liability insurance policy covers only claims for bodily injury or property damage. Its scope of coverage does not include most employment-related actions and other kinds of claims typically filed against boards.

Board members' personal policies tend to offer coverage similar to a general liability policy. Thus, even if these policies cover policyholders while they serve on a board, the type of coverage they provide usually is not sufficient. Some personal "umbrella" policies cover a broader array of claims, but many of those policies now specifically exclude board service.

An association also may seek to protect its directors from personal liability by indemnifying them. For well-financed associations, this can be a substantial assurance. In many states, an association may indemnify in some situations that are difficult to insure, such as payment of tax penalties. On the other hand, insurance can protect board members in certain situations when indemnification is not allowed.

Board insurance features

D & O insurance policies are designed for claims alleging harm (other than bodily injury or property damage) attributable to the management of an association. Most policy forms, however, do not directly state this purpose. Instead, the terms of coverage become evident only upon reading all of the terms and conditions, many of which differ markedly from standard insurance conventions.

Exclusions. If one had only five minutes to read a D & O policy, the time would be well spent examining the list of exclusions, which whittle away the broad coverage granted elsewhere. Because specific exclusions vary substantially among policies, lining up the exclusions of different policies for a side-by-side comparison is a critical step in evaluating policies.

One exclusion with potentially unrecognized adverse consequences for associations is generally phrased as the "insured versus insured" exclusion, which eliminates coverage when both parties to a lawsuit are insured under the same policy.

Under a policy with such an exclusion, an executive director's wrongful dismissal claim against the board might not be covered. The "insured versus insured" exclusion, however, can be modified so that it doesn't eliminate coverage for employment-related claims.

Association coverage. One significant difference among policies is their applicability to claims against the association itself and individuals other than directors and officers. Confusion regarding coverage for the association often arises because all D & O policies reimburse the association if it indemnifies its directors for their expenses and claims they have paid. The less common form of coverage is for claims that name the association directly (entity coverage).

Policies that include the association may be referred to as association professional liability insurance (APLI). Regardless of what the policy is called, coverage for the association is critically important if you are buying the policy to protect the association. As a standard feature or by endorsement, coverage may also be extended to employees and volunteers as well as directors and officers.

Defense costs. Because someone may sue a blameless board, the principal value of a D & O insurance policy for many associations may be coverage of legal defense costs. Before relying on a D & O policy for this purpose, however, understand that traditional D & O policies do not include a duty to defend per se.

Instead of obligating the insurance company to retain legal counsel and defend against a lawsuit, the typical D & O policy requires only that the insurer pay for the defense. The responsibility to obtain counsel may lie with the insured association or board member in consultation with the insurer (although under most policies the insurer may opt to control the defense).

Another major difference from most types of insurance policies is that legal defense costs are within the policy limits of a D & O policy. Rather than paying legal expenses in addition to claims up to the policy limit, the D & O policy subtracts legal expenses from the policy limit. Thus, a $1 million limit does not provide adequate protection for a $1 million judgment or settlement.

Because defense costs are treated the same as claims expenses, they are subject to the retention or deductible of a D & O policy. (Retention and deductible are often used interchangeably, but they differ technically in that a deductible - unlike a retention - is subtracted from the policy limit.)

One highly variable feature among D & O policies is their handling of defense costs for excluded claims. No policy will pay judgments or settlements for claims arising from intentional misconduct. Policies do differ as to whether they will pay to costs of defending against such claims. To the blameless director named in a vendetta lawsuit, defense costs needed for vindication are tremendously important.

Policy wording on this point is among the least standardized and can be difficult to understand. Some policies clearly state that defense costs will be paid for certain categories of claims that are otherwise excluded. Other policies achieve nearly the same effect by applying the exclusion only in the event of a final adverse determination.

Reimbursement. Another major difference from most other policies is that D & O insurance provides only for reimbursement of the policyholder rather than payment directly to a party bringing a claim or to the lawyer who provides the defense. Some policies do not pay until final resolution of a case, which can take years.

To reduce this burden, some policies provide for advancing expenses upon request by the policyholder. Good language to look for in a policy from reads, "pay on behalf of," "pay as incurred," "pay on a current basis," or "expenses paid upon notice."

A checklist that identifies the chief features that differ among D & O policies can helpful in obtaining a policy that provides the protection an association and its board members need. Although all of the features could not be covered in this article, an insurance agent should be prepared to clarify and explain the significance of each of the following points for any insurance policy being offered: * premium * policy limits (incident, total); * deductible (retention); * copayment (participation); * coverage for the association, subsidiaries, committees, advisory boards, staff, and volunteers; * types of claims covered (definition of wrongful act); * exclusions; * defense of excluded claims; * advancement of expenses; * if it is a claims-made policy, coverage for prior acts and availability and cost of extended reporting period; and * cancellation and notice.

Regardless of whether a board purchases D & O insurance, it has an obligation to reduce the likelihood that the association's operations will cause harm and spawn lawsuits. Insurance purchasing is merely one element in a comprehensive strategy that includes board training, risk management, vigilant oversight, training, and indemnification that enables board members to serve without jeopardizing the assets of the association or themselves.

Charles Tremper is executive director of the Nonprofits' Risk Management & Insurance Institute. This article is based on the booklet D & O - Yes or No?, published by the Nonprofits' Risk Management & Insurance Institute, 1828 L St., N.W., Washington, DC 20036.
COPYRIGHT 1992 American Society of Association Executives
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
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Title Annotation:directors and officers liability insurance
Author:Tremper, Charles
Publication:Association Management
Date:Jan 1, 1992
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