Though privately-held companies and nonprofit organizations are becoming more sophisticated in managing their executive risks, some misconceptions still persist with regard to the true nature of their liability exposures and the insurance products designed to guard against them.
More than ½ of every private or nonprofit firm doesn’t have Directors and Officers insurance for their executive employees and board members. Asked why they don’t buy the coverage, most of them say do not believe they need the coverage. This is simply misguided information. The reality is that executive liability claims can originate from a variety of sources, and they can harm a private or nonprofit organization of any size in any industry. The majority of those claims are filed in defense of an employee practices lawsuit, but other sources of claims can include customers and clients, competitors, minority shareholders, lenders and donors, as well as fellow executives or board members. Additionally, the biggest misconception is that your General Liability policy will cover you in this scenario- this is simply not true! These types of instances are specifically excluded under almost all General Liability policies.
Customers, clients and competitors pose a significant risk to private and nonprofit companies. Industry observers have noted a recent increase in lawsuits among competing firms that accuse executives and board members of slander, defamation of character and comments disparaging their products or services. Also, litigation over the theft or infringement of intellectual property, trademarks and patents is generally frequent. Regardless of the service they provide, directors and officers of nonprofit firms can be sued by donors, beneficiaries or the government for breaches of their fiduciary responsibilities, mismanaging collected funds, acting beyond their chartered authority or violation of state or federal laws. Nonprofit and private business executives also could find themselves facing client accusations of harassment, discrimination, poor products or poor service, as well as accusations by competitors.
What is the answer to reducing this risk within your organization? You need to purchase Directors and Officers Liability coverage, whether you are a nonprofit organization or a privately-held family for-profit group. The exposures are the same. Depending on the size of your organization, I would recommend no less than $1 Million limits, possibly $2 Million. Also, when you purchase the D&O coverage, make sure to add the Employee Practices Coverage to the policy. This is only available for Nonprofit Organizations as a group policy. If you are a for-profit business, you will need to purchase a separate policy for Employee Practices Liability.
In today’s litigious society, it never hurts to protect your interests. Remember, liability is the only insurance coverage where the more you buy, the cheaper the rate gets!
Bobby Bland PWCA, CIC
Vice President
Commercial Risk Service
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