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Monday, April 5, 2010

In Tough Economy Do You Cut D&O Insurance?

I recently noted an association executive's question to other association executives relating to directors and officers insurance, as follows:

"I have a question and I would really like your input on what your association does. We currently have a D & O insurance policy. Several years ago the Federal Government created the Volunteer Protection Act, that protects volunteers. Most non-profit associations have volunteer officers and directors. In light of this Act, do your associations still carry D & O insurance?"

My response is that associations should, if possible, continue to carry directors and officers insurance.

Volunteer protection acts are not new. They have been around for many years. Without these laws, directors and officers insurance would probably be more expensive.  However, they should not be depended upon to act as a substitute for carrying an actual policy.

Insurance is important for many reasons, including the following:
  • Volunteer protection acts are not particularly well crafted, or comprehensive. In some cases, they were hastily written and inconsistently worded.
  • Volunteer protection acts include various exclusions, such as for actions against a director based on self-dealing, conflicts of interest, actions brought by the Attorney General, many actions grounded in tort law (intentional conduct, wanton conduct, reckless acts, gross negligence, etc.), and actions related to membership restrictions. Those exclusions from coverage have led some experts to suggest that any protection under volunteer protection acts is illusory (that is, it looks like you are protected, but you are not).
  • Volunteer protection acts generally cover volunteers, not staff.
  • Even assuming a director or officer is protected by a volunteer protection act, the act must be pled in court as a defense. This alone can cost tens of thousands of dollars, even assuming the defense is upheld.

Again, I highly recommend nonprofit organizations carry directors and officers insurance, along with an "employment practices" rider (65% of such cases are brought based on allegations of sexual harassment, hostile work environment or wrongful termination).

While economic conditions and cash flow problems may be substantial, directors and officers insurance is essential (not optional) for many nonprofit organizations.  For organizations that need directors and officers insurance, it should be maintained until the organization ceases to exist.  If, following careful review and discussion of the issue as well as solicitation of expert advice, the insurance is deemed optional by the board of directors, then termination of the insurance might be an appropriate step to take.

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