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FAQ: What Associations Need to Know About D&O Insurance

Find the idea of getting insurance primarily for your board members a little confusing? This FAQ helps break things down.

When an association brings on board members, there’s a lot of orientation going on. But one question that might not come up is whether the board roles require insurance, and what that insurance might look like.

The guidelines around insurance for board members, called directors and officers liability insurance, or D&O insurance, can get a little murky. We spoke to Jason Tharpe, vice president of Affinity Nonprofits, a nonprofit insurance provider, to help explain what members and leaders alike need to know about D&O.

I’ve heard other names for D&O insurance. Just to be clear, what are we talking about?

The terminology has gotten a little wonky at times, reflecting an evolution of the sector, according to Tharpe.

“When I first started in the industry—coming up on 24 years ago—for associations, that used to be called association professional liability insurance,” he said.

From there, it evolved into its more common terminology as directors and officers liability insurance. However, there’s another wrinkle to this, Tharpe said: The terminology has changed again recently and is now often known as management liability insurance within the insurance sector.

The reason for the name change? Long story short, there’s been a shift in its coverage that has expanded its use beyond the traditional base of directors and officers.

“It’s sort of like a portfolio policy that covers the directors and officers portion and also employment practices liability insurance—which, if you have employees, you should have EPL insurance—and then also fiduciary liability insurance,” which pertains to employee benefit plans, he said.

When it comes to D&O insurance and its variants, such as EPL, what are some of the elements most likely to confuse people?

One of the biggest misconceptions about D&O insurance, specifically in its current form as management liability insurance, is that because it often comes packaged with EPL insurance, you need to have employees to leverage it.

“I’ve been trying to dispel [this] a lot,” Tharpe said. While EPL often covers a number of employment-related issues, such as wrongful termination and a failure to prevent sexual harassment issues involving employees, it extends beyond employees.

“It also covers something called third-party liability operation,” he said, noting that every organization, whether it has employees or not, needs third-party liability coverage. “That’s really protecting you against claims alleging discrimination and sexual harassment from any third party.”

That can extend to vendors and even members, he said.

Where does this type of insurance come in handy, anyway? And is it for the organization, or is it for members of the board?

Tharpe said D&O insurance use cases tend to be more common in the for-profit space, where concerns such as working in the interests of stockholders arise. For associations, Thorpe said claims tend to be more esoteric, emerging in situations such as severance and claims of poor management of an organization’s assets.

Because of the potential liabilities, it is important to board members that their association has strong protections on that front. After all, D&O insurance is really for the board members.

“It should matter to the individual board members because they’re volunteering their time to be on the board, and their personal assets could be at stake if they were ever sued for alleged negligence in their duties as being part of the board,” he said.

One other area where D&O insurance can carry its weight is in antitrust complaints.

“Any time you get a like-minded group of people together, there could be alleged price fixing or ways to edge other people out of the marketplace, whatever it may be,” Tharpe said, noting that such claims are usually costly to defend and need to be covered to manage liability risk.

What kind of pitfalls should organizations watch out for when setting up a D&O insurance plan?

The biggest consideration is whether defense costs are included in the insurance policy’s limit, as this can have a significant impact on the overall value of the insurance.

“A lot of what you’re going to pay for are lawyers’ fees, as everyone knows, and those costs keep going up,” Tharpe said. “Are those defense costs eating away at your limit of liability … or does your policy offer defense costs outside of that limit?” For example, if a policy has a $1 million limit and legal fees cost $600,000, you have only $400,000 left for settlement.

Another consideration is whether the policy includes cybersecurity protection, covering issues such as notifications and potential PR costs, though Tharpe noted that a full cyber insurance policy might be necessary instead.

(Mohamad Faizal Bin Ramli/iStock/Getty Images Plus)

Ernie Smith

By Ernie Smith

Ernie Smith is a senior editor for Associations Now, a former newspaper guy, and a man who is dangerous when armed with a good pun. MORE

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