October 23, 2007
Many of us give back to our communities by serving as directors and officers of non-profit organizations. As with any other organization, officers and directors of non-profit organizations may be sued. There are also statutory liabilities for unpaid wages, withholding taxes, environmental infractions, and other matters. These are all designed by governments to encourage directors to be responsible.
Typical general liability policies protect the organization, officers, directors and employees from claims for negligence (such as a slip and fall, a host liability claim, fire damage to the neighbour’s building). Coverage is often limited for claims other than typical negligence, or excluded entirely. Common risks excluded include employee benefit administration, defamation or breach of contract, and even professional negligence.
Uninsured liability however could discourage anyone from volunteering.
In response, the insurance industry has developed a product known as Directors & Officers Insurance. This coverage is sold to the organizations, but the principal insureds are the directors and officers, not the corporation. It may also be available to for-profit business, and is particularly desirable where there are directors not involved in management.
If a director or officer (or other insured) is sued for breach of contract or other causes of action excluded by commercial general liability policies, Directors and Officers liability policies may provide some coverage for disputes not insured under general liability.
Services corporations (including social services) should also have also have errors and omissions coverage.
Before joining a board, the extent of coverage is a good question to review as part of your due diligence.
Although the policies are not standard they normally contain three components:
- Coverage to protect the directors and officers of the company when the company cannot legally or financially indemnify them.
- Coverage for the corporation to reimburse the corporation for any amounts for which it is obligated in law to indemnify the directors and officers.
- Coverage for the corporation itself for its liability based on the actions of employees, directors, officers and volunteers, in certain defined circumstances.
Frequently, there will be defence costs coverage for breech of contract claims that are otherwise uninsured. There may also be defence cost coverage or other modified coverage available for pollution risks that are excluded under commercial general liability policies. Some directors and officers policies also have broader employment practices coverage then found in typical liability policies.
Because of late reporting restrictions in polices, it is crucial that insurance be fully investigated as soon a claim is made, either by a lawsuit or a notice of claim or awareness of facts which may give rise to a claim.
If your group, or you personally, have an incident occur which may give rise to a claim, prompt legal review of coverage is important, and cost is moderate. If the claim first arises in the form of a lawsuit, your broker and lawyer should consider all available coverages. In many cases, we locate coverages that assist with the payment or defence of claims.