Directors and Officers (D&O) policies are usually invoked by directors or officers who have been sued. Board directors are often adamant about obtaining large D&O policies (frequently, $1 to even $5 million), to protect themselves. As a matter of law, directors cannot be sued for negligence – they can only be liable for gross negligence or intentional bad acts (an intentional tort or a criminal act). A D&O policy will not cover liability for gross negligence or intentional bad acts. It only covers negligence. In other words, D&O insurance covers directors from claims that are not actionable. If it sounds odd, that’s because it is. It’s a great deal for the insurance company, but not so great for associations.
When a director or officer invokes a D&O policy, the insurer will invariably send a notice of reservation of rights, stating that the insurer can deny coverage at a later date, based on the terms of the policy. D&O insurance may cover legal fees in a lawsuit against a director or officer– to the time that the insurer decides that the director or officer may be culpable for gross negligence or an intentional tort. At that point, the insurance defense attorney can withdraw from representation and refuse to cover further legal fees or any settlement. Actual attorneys’s fees to the point that the insurer invoked its reservations of right are not likely to be $1 million.
A fidelity bond does not usually require the definition of the insured in the policy, since the policy covers losses caused by directors and officers (since they owe a fiduciary duty). An employee theft provision in a master policy does require the definition of the insured. That is usually in the form of a rider to the policy, that expressly includes coverage for losses caused by the wrongful or grossly negligent actions of directors and officers.
Rather than obtaining a $5 million D&O policy, an association would be better served by beefing up its fidelity bond or employee theft insurance. Again, the association should demand that the insurance agent provide a rider to the employee theft provision in a master liability policy, to ensure that directors and officers are covered. I had this issue arise in a case, where the insurance company claimed they owed nothing because the policy with the employee theft provision had no rider for directors and officers. That company finally paid the policy limit of $150,000, when I pointed out their agents had represented to mortgagees that the association had a fidelity bond, complete with a non-existent fidelity bond policy number.
Employee theft (or “crime”) insurance or a fidelity bond is critical to an association. If written correctly, both can provide coverage to associations suffering losses from the criminal activities of directors and officers.
Article provided by Jean Winters