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DIRECTORS & OFFICERS (D & O) LIABILITY COVERAGE
Did you know that when you volunteer for a board of directors that you are opening yourself up to a lawsuit? Most people don’t know this and mistakenly, most also think that they don’t have to worry about this, if they are serving on a volunteer board. Neither is true.
Contrary to common belief, volunteer boards and non-profit organizations are the most common groups to be sued by their members and the results can be quite messy and costly. At times, lawsuits are “frivolous” and “vindictive” against board members and certainly not justifiable, but it is still a lawsuit that has to be dealt with.
The purpose of D & O coverage is to protect the officers and directors for liability suits against them by members of the association that may not be pleased with the actions or directives taken by the board. D & O liability not only picks up the exposure the board may have through their actions, but also for their legal expenses. Even if the board or board member is not determined to be negligent, the D & O policy pays for the defence costs, which can add up to hundreds of thousands of dollars.
If the plaintiff is successful and it is determined that any member of the board did not act prudently, the entire board may be responsible for paying any judgments against them from their personal income and savings. That’s right… You may be personally responsible for all costs and any judgments brought about by the actions of any other board member!
It gets even more complicated though. While only one board member may be negligent, the entire board may be sued “jointly and severally,” which means that the plaintiff will seek compensation from the board member that will likely have the most money to pay the settlement. From there, that board member may have to make the payment from his own funds and then attempt to sue the other board members to recover a portion from each. Some board members may not have the ability to reimburse the first member, so there could be a lot of cost and definitely bitter results over such issues.
Most people do not understand what a board of directors can be sued for and why the courts would hold them liable to pay the award personally. The reality is that today, we live in a litigious society – everyone sues someone because it is so easy to do, they hear of “big rewards” and they would rather blame someone else than take responsibility for their own actions. The courts have stated that board members, especially for non-profit boards have a “higher duty of care” to make sure that they are looking after association and member assets to the best of their ability. Failure to do this in any way, basically suggests negligence or incompetence. As for what a board can be sued for, the list is endless, but here are a few examples:
a) Missing, mishandled or mis-spent funds,
b) libel or slander,
c) sexual harassment
d) constructive dismissal,
e) failure to purchase adequate insurance, (Yes, isn’t that ironic… A board can be sued by their members for failing to purchase D and O or any other type of insurance that the association should have had!)
f) any inappropriate board activity,
g) failure to support a political candidate adequately, causing the loss of an election,
h) improper documentation of meeting records,
i) irregularities in voting and election processes.
Those are just a few, but realistically, any time someone is disgruntled about a board member or the actions of a board, there is the possibility that a law-suit may be launched and the games begin!
When an association purchases D & O insurance coverage, board members no longer have to worry about such matters, because the insurance company is there to protect them. Even if the board / members have not done anything wrong and the suit is totally malicious, the policy will pay for the legal costs to defend them, thus saving the members from all the costs, except for the deductible, which is usually only $5,000.00. Our program only carries a $1,000.00 deductible if the Association is sued as a whole, but if a board member is sued directly, the deductible is completely waived!
The premium for purchasing Political Party Association D & O coverage through the A-WIN Insurance Network starts at as low as $600.00 yearly and can be purchased for either $1,000,000.00 or $2,000,000.00 in coverage. Prices may increase depending on the amount of assets, whether they have had claims, the number of directors, etc. And if there is a budget concern, we can arrange a monthly payment, so that associations don’t have to purchase the coverage in one payment. Usually, the maximum cost will be about $1,600.00 annually.
Board members need to realize that D & O coverage is really there to protect them and not the association, so even if an association is cash strapped and cannot presently afford the value of D & O coverage, we would recommend that board members do all they can to raise extra funds for their association to be used to purchase the coverage. Some associations may split the cost evenly with their board members, but most usually cover such costs as a way of showing their appreciation for generously donating their time and energy.
Some associations have asked if this policy will cover crime exposures such as embezzlement or theft of funds. No, it doesn’t do this, because most boards have checks and balances to make sure that their funds are secure. So if money does go missing, this policy will not reimburse the board for those specific funds. However, if the board is sued by members for failing to protect and look after such funds and if the courts agree that more should have been done by the board in this regard and subsequently, the board is required to pay back the missing funds, then D & O insurance will cover the amount that the board is now obligated to pay.
And as we have mentioned, it will cover all of the legal defence costs, whether the board was negligent or not, so either way, the board of directors is protected. With most associations carrying 15 – 20 board members, we know that this is a very small price to pay for the piece of mind that will only come through adequate D & O coverage.
Some associations have wrongfully assumed that they would be protected by the national office insurance program. This is not true because a D and O policy is specific to the board members listed on the application. If the local association office believes that they will be protected elsewhere, unfortunately there is no other policy that can come to their rescue.
Also, some associations have said that should something happen, they will deal with the problem at that time. When a D & O policy is issued, it will not cover for claims that occurred prior to the application being completed, so buying insurance after the fact will not work. In addition, some members assume that “someone” (usually a lawyer board member, or friend, etc.) will step up to the plate and help them through the crises. While it is always nice to have contacts in high places that may help out, in the even of a full-out legal action that may take between 3 – 5 years and thousands of man-hours to settle, the legal costs alone could be insurmountable.
Most lawyers are either not able to or have no desire to spend that much of their time and money helping out a group of individuals, especially if they were given the opportunity to buy the proper protection and chose not to!
The A-WIN Insurance Network is proud to be the official D and O insurer in Canada for political riding associations through certain underwriters with Lloyd’s of London, possibly the most prestigious of all insurers throughout the world. This D & O program is EXCLUSIVE to the Conservative Party riding association board members and will only be available at the rates quoted above, providing that associations take advantage of this program and purchase coverage. Normal D & O coverage rates are usually twice this cost, usually does not offer Libel & Slander coverage and most insurers decline any risks with political operations.
It is only through our knowledge of insurance, our relationship with Lloyds and involvement in the political arena that we have been able to arrange this program for EDA boards across Canada, with complete options in French, for our friends in Quebec. We believe it to be the best value and coverage available anywhere and would strongly encourage all associations to immediately complete an application and return it to us with a copy of their board member directly to bind coverage almost immediately.
Of course, should an election be called, this coverage will be even more important and valuable to protect board members and executive alike.
Should you have any questions, please do not hesitate to contact:
- VP of Commercial Insurance, Don Walker at donw@awinins.ca or Phone (403) 278-1050 Fax (403) 225-0515
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