Did you know that 26 percent of private companies report a D&O loss from insurance claims in the last three years, with an average reported loss of $387,000. The largest reported loss was $17 million!
Directors and Officers Insurance, also known as D&O Insurance, is a type of liability insurance designed to protect the personal assets of your board of directors and company officers in the event they are sued for actions or decisions made in their capacity as directors and officers. D&O is used in claims resulting from managerial decisions that have financial consequences. It can cover attorney fees, court costs, settlements and judgements in cases of discrimination, defamation, and mismanagement of funds. Coverage can also extend to defense costs arising out of criminal and regulatory investigations/trials. It does not cover fraud or other illegal acts, or loss arising from bodily injury or property damage.
Explaining D&O Insurance
So, who needs D&O Insurance? It’s not just for big, publicly traded companies with shareholders: any company or nonprofit with a board of directors helping run operations is at risk. Your board can be personally sued over their performance as board members or management of company affairs with lawsuits from employees, customers, investors and others. That’s a risk many won’t take, especially in New York where lawsuit demands can be higher.
D&O coverage can director and officers of for-profit businesses, nonprofits, privately held firms, and educational institutions.
Director and Officers Claim Examples Against Non Profits
Did you know that there have been over 1,500 D&O claims every year since 2010? Over 60% of these claims were directed at nonprofits. Due to the fiduciary and legal responsibilities nonprofit directors and officers have, there are several parties that can file against them as claimants in a lawsuit. This includes; donors, contributors, beneficiaries, recipients, regulatory bodies (ie, government officials from entities like the Department of Labor), members of the nonprofit, employees and third party affiliates.
Listen to this example:
A nonprofit has hosted a popular concert series for more than 40 years. This series has raised more than half a million dollars each year for the organization’s programs. The nonprofit was unexpectedly sued after ending a relationship with the vendor that supported the concert series. The organization was prepared for and protected against the lawsuit, due to proactive risk management planning. With the right D&O insurance coverage, the organization made sure the money raised through the concert series was dedicated to the visitors’ experience rather than paying legal fees.
Here is another scenario:
A non-profit association is named in a lawsuit filed by its members. The lawsuit alleges the recent election of a new Executive Director violated the procedures articulated in the association’s bylaws. This costs the organization over $100,000.
Nonprofit volunteers are also able to file suits. For example, a volunteer claimed the denial of a full time position at a nonprofit was due to her pregnancy. She files a lawsuit claiming discrimination.
Private Company D&O Claims Examples
Here are a few real life examples of private company D&O claims:
- A breach of contract lawsuit was filed by a vendor against Angel Food Ministries a few weeks after the not for profit shut down. The vendor accused the former ministry of failing to pay or return food, that had already been delivered to the ministry before it closed its doors.
- A group of creditors sued a power company that was undergoing restructuring of its debt. The creditors claimed that the power company’s restructuring plan did not compensate them according to the terms of their debt contracts.
- Shareholders filed a lawsuit against medical device maker, Medtronic, over their purchase of a health care products company. The lawsuit stated that long-time investors would be hit with substantial near-term taxes. They argued that the “reverse merger” structure of the deal, would result in a substantial loss to Medtronic shareholders who would be forced to pay taxes on any gains in the new stock.
- Halifax Health was sued by a spinal implant distributor who accused the hospital of violating bidding rules and improperly showing favoritism toward another longtime vendor. The lawsuit was settled with Halifax paying a $550,000 settlement to the implant distributor.
The effects and impacts of D&O losses on private companies are widespread:
- 96 percent report financial loss
- 42 percent report loss of productivity
- 36 percent report negative impact to company culture
- 31 percent report negative impact to brand reputation