Directors and Officers Insurance
What is Directors and Officers Insurance?
Directors and Officers Liability Insurance provides financial protection for the directors and officers of a company in the event they are sued in conjunction with the performance of their duties as they relate to the company. Think of Directors and Officers Insurance as a management Errors and Omissions policy.
Directors & Officers Liability Insurance can usually include Employment Practices Liability and sometimes Fiduciary Liability. The former involves harassment and discrimination suits, and is where the majority of exposure will be.
Directors and Officers Insurance is often confused with Errors & Omissions Liability. The two are not synonymous; Errors & Omissions is concerned with performance failures and negligence with respect to products and services, not the performance and duties of management. Generally, it is a good idea to carry both Directors and Officers Liability Insurance and Errors and Omissions Liability Insurance.
When do I need Directors & Officers Insurance?
Directors and Officers Liability insurance is needed when a board of directors is assembled. A board of directors will frequently require directors and officers liability insurance.
Investors, especially Venture Capitalists, will also usually require evidence of Directors & Officers Liability insurance as part of the conditions of funding a company.
Also having employees opens management up to employment practice lawsuits, which can usually be covered under D & O insurance.
What is a Non Profit Organization for D&O?
Non Profit Directors and Officers are legally responsible for the day-to-day decision-making of an organization. These board members can be held personally liable for any breach of duty.
WHAT IS A NON PROFIT ORGANIZATION?
A Non Profit Organization is defined as an organization founded to provide a socially desirable service with no intention to return financial benefits to its members. To meet this criteria, an organization must establish that is it not organized or operated for the benefit of private interests. Unlike for profit groups, non profits, including all charities, are not allowed to have shareholders with whom to share profits. In case of uncertainty, the general rule is that an organization’s charter (for profit vs. non profit) is determined by the authority it may exercise under that charter. Additionally, what an organization actually does is of more importance in determining its status than what it professes to be.
One of the benefits to being a non profit organization is a tax-exempt status. Non profits are organized under Section 501 (c) of the Internal Revenue Code. These organizations are exempt from federal, and usually state corporate taxes, if the proper rules and regulations are followed. There are several sub-groupings under section 501(c) that address a variety of charitable and social service organizations.
Many 501 (c) organizations must file a FORM 990 – Return of Organization Exempt From Income Tax Form with the IRS in order to maintain tax exempt status. There are exceptions to this rule that include churches as well as organizations with total revenues less than $25,000. (Form 990 may often be a good underwriting tool to help distinguish non profit groups from for profit organizations).
SEGMENTS OF NON PROFITS
There are three (3) distinct types of Non Profit Corporations:
1. The Public Benefit Corporation D&O Insurance
Formed for public or charitable purposes to benefit the general segment of society. These non profits usually have no members thus the Directors and Officers generally are seen as serving the public as a matter of trust.
2. Charities and Social Service Groups D&O Insurance
Most charities are non profit organizations. Special exposures for charities include the failure of a fundraising event which can result in claims filed against the charity by individuals who gave grants or money.
*Examples of Social Service Groups/Charities: Civic Groups, Social Welfare Organizations, Foundations
3. D&O for Schools and Education
Schools are usually administered by a board of governors/trustees comprised of teachers and external individuals, such as parents. If a fee-paying school goes out of business, the board may be at risk not only from creditors and banks but also from parents who may sue for the return of fees and tuition. Additionally, potential risks include claims regarding damage to children’s education.
*Examples of Educational Organizations: Day Cares, Montessori Schools, Private Schools, Charter Schools
The content displayed on this website is for informational purposes only and is not an offer of insurance. The purpose of the provided information is to assist in the general understanding of available coverage and does not modify the terms and conditions of any insurance policy, nor does it imply that any claim is covered. Coverage is subject to underwriting approval and the referenced coverage on this website may not be available in all territories and may vary depending on exposure. Coverage is also subject to minimum premiums that may vary by state.
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