Monday, December 28, 2009

Nonprofits – New Things To Know About D&O Insurance

A vital part of managing a nonprofit organization is the assessment of risks involved. Accidents happen. Mistakes happen. Not knowing what you are doing happens. Intentional bad things happen. They can lead to claims and law suits involving thousands, hundreds of thousands and millions of dollars... The organization, the board, individual board members, staff and volunteers can all be sued. The insurance coverage has to include both the cost of legal representation and potential damages, subject to a deductible. Nonprofit leaders who fail to assess the risks in the operation of the organization can open themselves as individuals as well as the organization to financial damages. There are two policies that are mentioned most frequently that nonprofits must have. They are Accident Liability Insurance and Directors and Officers Insurance (D&O). This article is about new concerns for D&O insurance. Please note there are limited protections for volunteers of nonprofit organizations for errors and omissions and as directors and officers, but it is – emphasis here – limited. A cost of doing business as a nonprofit organization must include the cost of appropriate and adequate insurance. And Sisters and Brothers here is where detail is the Devil. This article is about new details that have developed. They were featured recently in the International Risk Management Institute, Inc., D&O Compass e-newsletter and are featured here by permission. I have also provided a RESOURCE and DEFINITIONS section to help you develop an online library of articles, knowledge base and contacts about insurance.

Directors’ & officers’ liability insurance (D&O insurance) — Insurance that provides coverage against wrongful acts which might include actual or alleged errors, omissions, misleading statements, and neglect or breach of duty on the part of the board of directors and other insured persons and entities. Many D&O policies include employment practices liability coverage.

(Source – Nonprofit Risk Management Center – see DEFINITIONS below)

D&O insurance is not like a new coat that you buy off the rack. Based on the definition where may the organization be vulnerable? What items on the D&O menu of coverage are needed? What amount of a deductible can the organization live with? D&O does not cover theft, forgery, theft through technology, illegal use of computers, property damage, bodily injury, fire, pollution or environmental claims. Are you sure you know what D&O can cover? Having the assistance of an insurance agent or attorney knowledgeable about nonprofits and insurance can assist you in making wise choices.




  1. Case #1 - Using D&O insurance for coverage of Employment Practices Liability (EPL) – there are strong reasons review your D&O policy and if necessary to add additional language and coverage for protection of the nonprofit organization and its nondirectors and nonofficers or purchase an additional separate EPL policy
  2. Case # 2 - D&O insurance adds protection to the organization and it also provides legal counsel to defend the organization and to handle claims. But there are some details that can cost the organization a significant amount of money in legal costs if not clarified at the beginning. Here is the story of a hospital that was hit with substantial attorneys’ fees for failing to look at details even though it was insured.


The Towers Perrin Survey of Insurance Purchasing Trends released this fall revealed that a majority of insureds rely on their D&O policy rather than a stand-alone form as a source of employment practices liability (EPL) coverage.

More specifically, the survey indicated that 57 percent of participants purchase EPL coverage as part of their D&O policy (33 percent bought a stand-alone policy, while 10 percent did not buy EPL insurance).

Adding an EPL coverage endorsement to the D&O policy does indeed provide inexpensive coverage (i.e., premiums range from 10 percent of the D&O policy premium to no additional premium). Yet, obtaining EPL coverage in this manner is not without certain pitfalls.

When designing and negotiating EPL coverage under a D&O form, here are several tips to help you avoid the drawbacks commonly associated with EPL endorsements to D&O policies. In descending order of importance, coverage should:

  • Provide entity coverage, since virtually all EPL claims name the corporate entity;
  • Be subject to a separate policy limit (to avoid diluting D&O limits with EPL claims);
  • Name nondirectors/nonofficers as insureds, in addition to directors and officers;
  • Cover a broad range of workplace torts in addition to merely discrimination, sexual harassment, retaliation, and wrongful termination;
  • Contain a separate, lower retention, since D&O retentions are generally much higher than those under EPL forms.

When seeking to cover EPL exposures, the adage "you get what you pay for" clearly applies to EPL endorsements under D&O policies. Some, but not all, EPL endorsements to D&O policies incorporate these coverage aspects. Yet if these items are not incorporated within such endorsements, the actual scope of EPL protection will be limited.

Our next issue of D&O Compass will be in January. Best wishes for joyful holidays along with good health, prosperity, and happiness in the New Year.

All the best,


Bob Bregman, CPCU, MLIS, RPLU
Senior Research Analyst
International Risk Management Institute, Inc.



Under many D&O policies, especially those written for large, public companies, the duty to defend (and the concomitant right to control the defense) is reserved to the insured, and the insurer merely agrees to reimburse defense costs. One practical implication of this arrangement is that the insured may be held to implicitly carry the burden of proof on the issue whether defense and indemnity costs can be allocated between covered and noncovered claims. In this case there are issues of negligence and intentional wrong conduct.

In Camden-Clark Mem. Hosp. Ass'n v. St. Paul Fire & Marine Ins. Co., 682 S.E.2d 566 (W. Va. 2009), the court explained that, generally, the insured bears the burden of proving that all or a portion of a judgment is encompassed by the insuring agreement of an insurance policy. Courts recognize an exception to that rule if the insurer has the duty to defend. In that situation, the insurer who is in control of the defense is in the best position to develop the factual record necessary to make an allocation, and so courts hold that the burden of proof on the allocation issue should be shifted over to the defending insurer.

The problem in the Camden-Clark case was that the insured hospital retained the duty/right to defend suits under a self-insured retention (SIR) to its medical professional liability policy. Accordingly, it hired its own defense counsel and exercised exclusive control over the defense of a large medical malpractice claim. Although the professional liability insurer had a right (within the policy form) to associate in the defense, it never did so.

After a lengthy trial, the jury returned a $6 million verdict for the claimant, which included punitive damages for trying to cover up the medical mistake after the fact. The hospital's professional liability policy covered negligence but excluded intentional conduct. Although the hospital's defense attorney submitted special interrogatories, he never quite asked the jury to allocate the damages specifically between negligent conduct (which was covered) and intentional conduct (which was not covered).

The West Virginia Supreme Court held that, since the professional liability insurer did not exercise any control over the defense of the claim, there was no reason to shift the burden of proof on the allocation issue to the insurer. That burden stayed with the insured hospital. Because the hospital's defense attorney failed to ask the jury to make an allocation between negligent conduct and intentional conduct, the hospital failed to carry its burden, and the hospital lost the opportunity for a partial insurance recovery for the amount of the damages associated with the negligent conduct.

Although the Camden-Clark case involved a hospital professional liability policy, its analysis is applicable to any kind of insurance policy, including D&O policies. Other courts have recognized that, when a D&O insurer does not have a duty to defend, the burden of proof on the allocation issue remains with the insured.

This may come as a surprise to many D&O policyholders. First, it would seem that the insurer should be required to show that a portion of the damages falls within an exclusion, and so the insurer should carry the burden of proof on the allocation issue in all cases. But that is not how courts see it.

Second, D&O policies typically say that the parties will use "best efforts" to make the allocation without specifying which party technically bears the burden of proof should that issue be litigated.

Don't get caught unawares. If control of the defense is important enough to lead to the purchase of a reimbursement D&O policy that does not include a duty to defend, the insured should remain cognizant that the right to control the defense carries with it the implicit burden of proof on the allocation issue. Remind your defense attorney (who may not be up to speed on the nuances of insurance law) to ask the jury to allocate the damages between covered and noncovered claims so that you can preserve your opportunity for a partial insurance recovery.

Alternatively, you might try to modify your reimbursement D&O policy so that it expressly says that the insurer bears the burden of proof on the allocation issue. In practical terms, that would mean that, if a nondefending insurer thinks there is an allocation problem, it must assert its contractual right to associate in the defense of the
case to develop the factual record necessary to make an allocation in a later declaratory judgment action after the liability case is over.


“Used with permission of the publisher, International Risk Management Institute, Inc., Dallas, Texas, from D&O Compass, copyright International Risk Management Institute, Inc. Further reproduction prohibited. You may subscribe to D&O Compass or other free risk management and insurance newsletters from IRMI on its website.

I want to acknowledge my deep appreciation to IRMI and Natalie J. Ewton. Marketing Direct Mail Coordinator & Permissions Editor, International Risk Management Institute (IRMI) for their gracious cooperation. As Ms. Ewan stated to me, “Normally we don’t allow this, but given the nature of your blog we will make an exception if you are willing to sign a reprint authorization agreement and acknowledge our copyright… “ – I appreciate the trust in this work..

Reading this article is no substitute for consulting with an attorney about these issues. The author is a volunteer in his community and in the virtual world of nonprofits on the Internet He is a licensed attorney in New Jersey. He has no clients. He seeks no clients. He accepts no clients or consulting work. He may offer legal information in this blog and other material from time to time but not legal advice. If you write or say to him, “I have a short legal question…”., he will have no answer for you except consult an attorney.


For additional web sites featuring information, resources and helpful articles insuring nonprofit organizations, see –

Glossary of Risk Management and Insurance Terms -

Why is Directors' and Officers' insurance important? BoardSource Q and A about D&O insurance -

What Boards Need to Know about Liability Insurance by Pamela Davis -

Directors and Officers Insurance - Part 1 by Pamela Davis

Directors and Officers Insurance - Part 2 by Pamela Davis -

GuideStar articles about insurance considerations –

  1. Insurance Trips and Traps for Nonprofits -

  1. Making Insurance Easier to Administer -

  1. Nonprofit Directors and Officers Insurance: The Good, the Bad, and the Ugly -

Risk Management Tutorial for Nonprofit Managers - Nonprofit Risk Management Center

Insurance Needs by the Public Entity Risk Institute (PERI), a nonprofit research institute focused on support for risk management

State Liability Laws for Charitable Organizations and Volunteers Published in September 2001 by the Nonprofit Risk Management Center (Updated in August 2005 and 2008 with additional case cites -.Section on New Jersey updated in January 2009.) This publication is based on a careful review of legislation and databases that report judicial outcomes. If any readers identify an area where the information presented is incomplete, inaccurate or misleading, they urge you to contact them so that they may update their records and this publication. To provide an update or information with respect to any statute or relevant case, please call (202) 785-3891 or send relevant information to:

Insurance Guide for Nonprofit Organizations – Blue Cafe Interview of Pamela Davis

Nonprofit Good Practice Guide, This toolkit from the Johnson Center at Grand Valley State University defines risk management and offers links, resources, and ideas for effective risk management in a nonprofit organization. –

Insurance Overview for New Jersey Nonprofits from the Center for Nonprofits -

(Risk Assessment and Management)

Basic Considerations in Risk Management and Risk Management by Carter McNamara and

The Violence Vulnerability Assessment: Sometimes Ignored - Always Essential! - by James N. Madero, Ph.D.

Risk Assessment Road Map Toolkit, Insurance Rating Assessment - State of Oregon - and

Smart Contracting Toolkit – State of Oregon

Risk Management for Non-for-Profit Organizations by Paulette Vinette, CAE –

Risk Management: Whose Job is it Anyway? by Mary Lynn McPherson -|K=227660|RefreshT=|RefreshS=Container|RefreshD=|A=Body

Exactly How Can the Board Manage Association Risk? by Paulette Vinette, CAE –|K=223640|RefreshT=|RefreshS=Container|RefreshD=|A=Body

(Workplace Safety)

Accident Preparation and Response Tutorial is a free web-based tutorial designed to teach nonprofit organizations how to respond effectively to accidents. It focuses on the nonprofit's and its staff's actions shortly after an accident, during which missteps can have a significant impact on legal and insurance outcomes. It includes checklists to print and to keep in appropriate locations

Nonprofit Risk Management Center's Workplace Safety is No Accident: An Employer's Online Toolkit to Protect Employees and Volunteers is a must read for all nonprofit managers - .

Workplace Safety Is No Accident - Tutorial with sample policies and procedures -

(Fraud, Theft)

Fraud Prevention Check-up from the Association of Certified Fraud Examiners -

Sample Fraud Examination Documents from the Association of Certified Fraud Examiners -

Sample Fraud Examination Checklist -

(Volunteers and Insurance)

Developing and Managing Volunteer Programs -

No Surprises Volunteer Risk Management Tutorial -

A Patchwork Of Protection: Sources Of Volunteer Immunity For Medical & Public HealthVolunteers -

Federal Volunteer Protection Act - and

Sample of a state law, MassachusettsOfficers and directors of charitable corporations; tort liability -

(Resource Library-type Material)

The Insurance Information Institute has free resources and material for nonprofit groups -,com_bookmarks/Itemid,44/mode,0/catid,40/navstart,0/search,*/


The National Safety Council -

Nonprofit Risk Management e-news

Insurance Against Liability -

Insurance for NPOs from CIMA -

Business Continuity PlanningTutorial designed to help you and your organization develop, implement, and test a workable plan to prevent the interruption of mission-critical services, even in the event of a major business interruption.

Risk Management Essentials is the Nonprofit Risk Management Center's 16-page newsletter distributed three times a year

Insurance Questions for Nonprofits - and

DEFINITIONS selected from the Nonprofit Risk Management Center:

Directors’ & officers’ liability insurance (D&O insurance) — Insurance that provides coverage against wrongful acts which might include actual or alleged errors, omissions, misleading statements, and neglect or breach of duty on the part of the board of directors and other insured persons and entities. Many D&O policies include employment practices liability coverage.

Commercial general liability insurance (CGL) — Covers liability exposures that are common to all organizations; a combination of three separate coverages, each with its own insuring agreement and exclusions: Coverage A = general liability; Coverage B = personal injury and advertising injury liability; and Coverage C = medical payments.

Commercial property insurance — Covers risk of loss to an organization’s buildings or personal property. Usually includes buildings, personal property of the insured, personal property of others on site and in insured’s possession. Coverage can be on an all risk or specific perils basis.

Employee benefits liability (EBL – Sometimes called E&O) — Covers errors and omissions in the administration of the insured’s employee benefits such as health insurance or pension benefits.

Employment practices liability insurance (EPLI or EPL) — Insurance that provides coverage for claims arising out of employment practices. EPLI policies generally cover the organization, its directors, officers, and employees.

Insurance — Traditional risk-financing tool used to transfer the financial hazard of risk. An insurance policy spells out what is or is not covered caused by all or specific perils (causes of damage or injury). Insurance is also a contract whereby an organization agrees to indemnify another and/or to pay a specified amount for covered losses in exchange for a premium. For many nonprofits, insurance provides the funds to pay for the nonprofit’s unexpected losses of people, property and income, while ultimately keeping the organization in operation.

Insurance program review — A review of the nonprofit’s existing insurance coverages for the purpose of identifying coverage gaps, overlaps and commenting on the adequacy of specific policy terms, limits and deductibles...

Personal liability policy (volunteers) — Provides protection if the volunteer is liable for bodily injury or property damage arising out of the performance of his or her duties; generally written on an excess basis. Purchase separately or bundled with accident medical reimbursement and/or excess automobile liability insurance for volunteers.

Property insurance — Insurance that covers direct damage to the nonprofit’s property and equipment including consequential losses (business income, loss of rents, extra expense) caused by an insured peril.

Risk assessment — A thorough examination of the exposures of the nonprofit, both insurable and uninsurable

Risk management committee — A representative group of staff, volunteers and advisors who identify exposures, develop a risk control program, and establish a risk-financing strategy for the nonprofit. May act in place of a staff designee in small nonprofits. In midsize and large organizations, they may work in partnership with the staff designee (such as finance director or professional risk manager).

Umbrella liability insurance — Provides excess coverage over several primary policies, such as CGL, auto liability and employer’s liability. Increases the amount of liability insurance beyond that of the basic policies carried by the nonprofit and reaches out to cover areas of unknown exposures lacking in the basic insurance policy.


Aaron said...

Thanks, Don, for all of this information!

I haven't had time to read everything, so forgive me if this question is answered in your text or links. Are liabilities that arise due to conflicts of interest on the part of board members covered by D&O insurance?

Kay Lorraine said...

Wow, this is a lot of information to digest. Thanks for putting it together, Don. Do you mind if I become a regular follower of your blog? Good stuff. Good stuff.

Kay Lorraine
Nonprofit Executive
Honolulu, Hawaii

Xris Roberts said...

This was one of the chief arguments in favor of national health insurance reform. Shouldn't workers have portability of health insurance?

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