Brief overview of Directors & Officers Liability Insurance as it applies to non-profit organizations.

1. Directors’ and Officers’ Liability Insurance
for Non-Profit Corporations
What is Directors’ and Officers’ (D&O) What is covered?
Liability Insurance?
Coverage under a D&O policy is dependent on the particular
A D&O Liability Insurance policy will generally provide for wording of the policy’s definitions, insuring clauses, conditions and
defence costs and indemnity coverage to the non-profit’s directors endorsements. However, D&O policies generally cover losses arising
and officers for loss arising from lawsuits alleging internal out of the negligent mismanagement of the non-profit. Intentional
mismanagement of the non-profit. The policy will also provide the wrongdoing and matters covered more directly under other policies
non-profit protection when it indemnifies its directors and officers of insurance are typically not covered under a D&O policy. It is
for losses referred to above and in a number of cases where the non- important to ensure that your D&O coverage will extend to the
profit is sued directly by third parties for certain wrongful acts. many different types of proceedings that can be commenced against
those alleged to have committed wrongful acts and that claims for
Unlike commercial liability, homeowners’ and automobile policies, damages, as well as other types of relief, are covered under the policy.
which respond to occurrences that take place during the policy
period (occurrence-based policies), a D&O policy covers insured What is not covered?
individuals and the non-profit for claims that are made and reported
during the policy period. Coverage can extend to wrongful acts that There are a number of matters that are specifically excluded from
occurred long before the non-profit’s current policy was in place. coverage in a D&O policy, the most common being:
However, due to the nature of this policy, reporting requirements
before and during the policy period are more onerous than those • fraudulent and criminal acts
in occurrence-based policies, and must be adhered to in order to
preserve coverage. • bodily injury and property damage
• fiduciary liability claims
Who is covered?
• pending or prior litigation
There are a wide variety of individuals who are covered under the
typical non-profit D&O policy. Directors, officers, employees, • pollution claims
volunteers, trustees, students, part-time and leased workers and
committee members are all generally included as insured individuals • claims made by one insured against another
under the policy. As mentioned earlier, the non-profit, as well as • breach of contract claims
its subsidiaries are also insured for certain wrongful acts, such as
those involving employment practices. The policy also provides the • professional services claims
non-profit with reimbursement (subject to a deductible) when it
indemnifies its directors and officers for losses sustained as a result of Exclusionary language can appear anywhere in the policy, so it is
a covered claim. important to review the entire contract of insurance, and not just
the exclusion and endorsement sections, to determine the extent
Who is not covered? of coverage the policy provides. Where insureds are alleged to
have committed fraudulent and/or criminal acts, it is important
Although insurers, for an additional premium, are willing to for the non-profit to consider to what extent it wishes the policy
add other individuals as insureds under the policy, independent to provide defense costs. Many D&O policies will continue to pay
contractors, outside consultants, and members/shareholders are the defence costs of insured individuals until such time as it has
typically not covered under a non-profit D&O policy. Individuals been determined by a court that they are guilty of the fraudulent or
who provide the non-profit with professional services are also criminal conduct that is otherwise excluded from coverage. It is also
generally not covered for wrongful acts committed in that capacity. important to note that a number of the matters typically excluded
in a D&O policy can be brought back into coverage for an additional
premium.
This publication contains general information only and is intended to provide an overview of legal, liability and insurance issues.
The information is not intended to constitute legal or other professional advice.
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2. What happens when there is a covered claim?
There are very specific claims reporting requirements in a D&O policy that must be complied with in order to preserve coverage. The insured
must notify the insurer as soon as practicable about any claims made or facts and circumstances that could reasonable lead to a claim.
The majority of non-profit D&O policies obligate the insurer to defend any claims made against any of the policy’s insureds for matters
covered under the policy. As a result, the insured is not permitted to hire counsel or handle any action without the consent of the insurer. The
insurer has control of the action and the insured must not do anything to compromise the insurer’s ability to properly defend any third-party
action.
It is important for the non-profit to understand its role once there is a claim and the limitations placed on it with respect to settlement. Many
policies contain provisions that penalize an insured for not agreeing to a settlement the insurer believed was fair and where a subsequent court
case awards the third party more than the proposed settlement amount. Whenever possible these provisions should be eliminated or softened.
What is the best approach to take when purchasing D&O insurance?
The D&O insurance policy is a complex document with many subtle nuances that can affect coverage. As well, the application for D&O
insurance may contain many traps from the insured’s perspective. It is therefore recommended that non-profits consult with a trained D&O
insurance specialist before purchasing a D&O Liability Insurance policy.
Brian Rosenbaum, LL.B
Legal and Research Practice
Financial Services Group (Aon)
This publication contains general information only and is intended to provide an overview of legal, liability and insurance issues.
The information is not intended to constitute legal or other professional advice.
www.aon.com