November 17, 2023

Common Mistakes to Avoid with D&O Insurance

Directors and Officers (D&O) insurance is a crucial component of risk management for non-profit organizations. It provides protection for the personal assets of board members, officers, and other key individuals who make critical decisions for the organization. While D&O insurance can be a lifeline in the event of a lawsuit or liability claim, there are common mistakes that non-profits should be aware of and avoid to ensure they get the most out of their coverage. In this article, we will highlight some of these errors and offer guidance on how non-profits can steer clear of them.

Neglecting to Secure D&O Insurance

One of the most significant mistakes that non-profits can make is to neglect securing D&O insurance altogether. Many assume that their organization’s good intentions and non-profit status will protect them from legal liabilities. However, this is a dangerous misconception. Without D&O insurance, board members and officers are personally exposed to financial risk in the event of a lawsuit. Non-profits must recognize the importance of this coverage and invest in it proactively.

Failing to Customize Coverage

Another common mistake is treating all D&O insurance policies as one-size-fits-all. Non-profits should customize their D&O insurance to match their specific needs and risks. Not all organizations face the same types of legal challenges, so it’s essential to work with an experienced insurance broker to tailor a policy that covers the unique risks associated with your non-profit’s operations.

Inadequate Policy Limits

Non-profits often underestimate the potential financial impact of a lawsuit, leading to the mistake of setting insufficient policy limits. In the event of a significant claim, this can leave board members and officers vulnerable to personal liability. It’s crucial for non-profits to assess their exposure carefully and select policy limits that provide adequate protection.

Lack of Regular Policy Review

Once a D&O insurance policy is in place, it’s a common mistake for non-profits to file it away and forget about it. Non-profits should conduct regular policy reviews to ensure the coverage remains up to date with changes in the organization’s structure and operations. As the non-profit evolves, so do its risks, and its insurance policy should evolve with it.

Not Disclosing Information Accurately

Accurate disclosure of information during the underwriting process is crucial. Non-profits must be transparent and provide the insurance company with all relevant information about their operations and potential risks. Failing to disclose this information can result in coverage disputes or even the denial of claims.

Neglecting to Train Board Members and Officers

Effective governance is a cornerstone of D&O insurance protection. Non-profits often make the mistake of not providing proper training and guidance to their board members and officers about their responsibilities and the potential risks they face. Training can help prevent errors and omissions that might lead to legal claims.

Choosing the Lowest Premium

While it’s tempting to select the insurance policy with the lowest premium, this can be a costly mistake. Low-cost policies may provide inadequate coverage or have hidden exclusions that can leave non-profits exposed in the event of a lawsuit. Non-profits should prioritize comprehensive coverage over cost savings.

Conclusion

D&O insurance is a critical tool for safeguarding the financial interests of non-profit organizations and their leadership. To maximize the benefits of this coverage, non-profits must avoid the common mistakes highlighted in this article. By securing appropriate, customized coverage, regularly reviewing policies, and providing proper training to board members and officers, non-profits can ensure they have the protection they need to carry out their important missions without unnecessary financial risk. Remember, D&O insurance isn’t just a policy; it’s a safety net that can make all the difference when facing legal challenges.