First, let me say that, with this post, I'm not offering legal advice, nor am I holding myself out as an expert in insurance. I'm simply sharing my opinions and the information I have gained during my career in association management. Now that we've gotten that out of the way, here's the heart of the matter.
Virtually anyone in the business world understands that general liability insurance is an absolute necessity for almost any organization, even those that do not have a physical plant. Associations and other not-for-profit organizations, though, sometimes wonder whether directors & officers (D&O) liability coverage is necessary, particularly when it is expensive. What follows is my perspective, and my advice to the officers and directors of almost any not-for-profit organization or association.
The moment a person assumes a position as a board member of a not-for-profit organization, he or she assumes a level of responsibility for the organization ("duty of care") and becomes exposed to claims that he or she is not running and managing it properly. While the decision to buy or not to buy D&O coverage depends, in part, on the likelihood is that one of the organization's board members will be the target of such a claim, it should also be based on the premise that an uncovered claim could decimate the organization.
Claims against an organization generally would fall into two categories: bodily injury (physical harm) and non-bodily injury (non-physical harm, such discrimination, termination, collusion, or restraint of trade). The majority of claims are for bodily injury. An association's general liability insurance typically would cover board members, subject to the terms and conditions of the policy, for claims arising out of bodily injury and property damage.
D&O liability insurance only covers non-bodily injury claims. As suggested above, non-bodily claims include employment-related claims, mismanagement of funds, collusion, restraint of trade, libel, and other such claims (it's important to note that libel and other such claims would not be covered, under a typical policy, if it were intentional or done with malice).
Concerns about non-bodily injury lawsuits would be one argument to have D&O insurance. Although there are relatively few reported cases of D&O claims, it is sufficiently common to justify, in my opinion, having coverage. Even claims that have been filed and then either settled out of court or dropped can be expensive, so D&O coverage can offer a level of protection that can ease directors' minds.
Fundamentally, there are two types of lawsuits in which a claim might be brought against member of a board of directors: derivative lawsuits and direct or third-party lawsuits.
Derivative lawsuits are claims against a board member on behalf of the corporation. A typical claim here would be mismanagement of assets. In many states, only a few people have "standing" or the right to bring such claims. They are: 1) board member(s) suing other board member(s) 2) members of an organization suing a board, and 3) the state Attorney General.
Because of these restrictive rules, derivative claims are relatively uncommon. Claims of these types are not made for awards to an individual, but rather to make the corporation "whole."
Direct or third-party lawsuits are brought by an employee or by a person not connected with the corporation who asserts a claim against it or its board on account of some non-bodily injury. These might include restraint of trade for preventing a company from getting access to association benefits, or a claim of defamation
Employment practices such as termination and discrimination are the largest exposure in these types of claims. If you have a small, friendly staff, and feel unlikely to have employment claims resulting in a lawsuit, you might not think it necessary to carry D&O insurance. However, when employees feel they have been wronged and are angry, they may file a claim even if it is baseless. At that point, you would need to hire lawyers. Your D&O then becomes a legal defense policy.
D&O insurance is essentially legal defense insurance in most cases. The vast majority of the cases brought against a board are thrown out, but the organization must pay legal fees if a claim is filed.
According to some people, the "deep pocket" theory is relevant in this context. This theory asserts that only people with money are likely to be sued and that lawyers may file a suit based on an artificial claim against "deep pocket" board members with the hope of securing a settlement for their client. Organizations that have a board made up of "ordinary" people who aren't known to have vast amounts of money may then be comfortable without D&O insurance. I wouldn't advise it, but that's what some organizations decide to do.
Assuming an organization decides to pursue D&O coverage, it should look carefully at the policies offered. Questions should be asked and answered about who, specifically, is covered, what exclusions are in place and under what conditions, etc. If employment-related claims are excluded, for example, an association that has its own staff may well decide the coverage is insufficient. An association that engages an association management company would not have the same concerns, of course, because the liabilities for employment-related issues fall to the management company, in most cases.
When selecting an underwriter, I suggest the association find out what the rating of the company is and that the association never sign on with a company whose rating is less than "A.". A.M. Best & Co. and Standard & Poor are two of the larger companies who provide underwriter ratings. I suggest you also determine whether the company has a reasonable record of claims payments; ask your broker or agent to show you how it is viewed by the rating organizations.