Perils: Potential Problems

D & O policies complement CGL coverage--although the two policies alone do not necessarily provide "complete" protection against everything that can go wrong. D & O coverage protects against liability claims not seeking compensation for bodily injury and property damage.

Most D & O policies do not list specific types of covered claims. Instead, they cover "wrongful acts," a term that typically includes coverage for actual or alleged errors, misleading statements, and neglect or breach of duty. Coverage is then narrowed by a list of limitations and exclusions. Any exclusion must be examined to determine the full extent of its impact.

A common exclusion with potentially unrecognized adverse consequences is generally called the "insured versus insured" exclusion. Initially designed to eliminate coverage for struggles over organizational control, which can be intractable, this exclusion may eliminate coverage for employment-related suits. For instance, if the nonprofit's executive director is insured under the policy, his or her wrongful termination claim against the board members would be excluded by the "insured versus insured" exclusion. If so excluded, coverage might be available in a separate Employment Practices Liability Policy.

Although the insurance industry does not have a "standard" form," a D & O policy might include coverage for:

• a wrongful termination lawsuit (on the grounds of breach of an employment contract or unlawful discrimination);
• a lawsuit alleging that a board decision to sell an older building to purchase a new, more luxurious building was ill-advised and a waste of charitable assets;
• a lawsuit against the directors for failing to prevent political, partisan activities that resulted in the revocation of the organization's tax-exempt status;
• a lawsuit against the directors for failing to purchase an adequate insurance safety net;
• a charge of neglect based upon use of targeted donations to pay general operating expenses or failure to prevent misappropriation of funds; and
• errors in a newsletter or nonprofit publication

In summary, a D & O insurance policy typically covers claims arising from governance and management.

Shareholder lawsuits. They can be your worst nightmare. The source of 50% of all directors and officers liability (D&O) claims, shareholder suits typically name the corporation in addition to personally naming the directors and officers. According to the most recent Watson Wyatt survey, settlements in these cases average $7.6 million, with defense costs often adding another $1 million to the bill. Most companies and their executives count on their D&O policy to respond. What they don't anticipate is allocation, a common bone of contention between insureds and their insurer. Allocation is the process of dividing -costs between covered parties (typically the executives) and uncovered parties (typically the corporation or other third parties), and covered and uncovered allegations.

Before a shareholder lawsuit arises, directors, officers and the corporation can secure a comprehensive D&O liability insurance program that addresses the allocation issue up front. Chubb, a leading provider of directors and officers liability insurance, provides its customers with several solutions in addressing allocation. Read these directors and officers loss scenarios, and then ask your agent or broker about D&O insurance from Chubb and our creative allocation coverage solutions.

©2006 Professional Insurance Associates, Inc. All rights reserved. PIA