Liability Limits for Directors and Officers Liability Insurance
Submitted by Peter Andrew, President & CEO of Council Services Plus
The question is often asked about how much liability insurance is enough. The answer is not easily given. In this day where six figure lawsuits are commonplace, evaluating, and more importantly, feeling comfortable with your current limits can seem an insurmountable task.
To begin to answer the question, the first item to understand is what limits of liability are and how are they defined in your policy. The limit of liability stated in your Directors and Officers (D&O) liability policy is the most that your policy will pay out for all claims and defenses expenses covered under the policy. Assuming a claim is covered (and not all claims are) and your limits of liability are $1MM per claim and $1MM in the aggregate, your policy will pay up to $1MM for each claim (per claim) and $1MM total for all claims in a policy year (in the aggregate). Most liability policies shows the per claim and aggregate limits separated by a backslash ($1,000,000/$1,000,000).
Defense expenses can decrease your ability to pay claims under your policy. If your defense cost are inclusive of your policy limits, the cost for defense attorneys can be deducted from your per claim and aggregate limits. For example, if you have a $1MM per claim policy limit and have a claim for $700,000, but your defense cost total $500,000, you could not be covered for $200,000 of that claim. The best way to have defense expenses covered is outside of your policy limits. With policies written with defense expenses outside the limits of liability, the cost for defense does not diminish your ability to pay a claim. Under defense cost outside policy limits, the previous example would have been covered in full.
Another important aspect to evaluating your limits of liability is to know what are the national averages of claims within your particular industry. With respect to D&O within the nonprofit community, a recent report from the Wyatt Nonprofit Organization D&O Liability Survey noted that, for nonprofits, defense costs for claims closed by litigation averaged $87,880. Those closed by settlement averaged $35,028. The survey also reported that indemnity payments (actual claims paid) averaged $457,000.
To summarize, most small to medium nonprofit organizations should be adequately protected with D&O policies with limits of $1MM or $2MM provided defenses cost are outside the policy limits (and preferably unlimited). There is no guarantee that these limits will always be sufficient. We recommend evaluating your coverage and policy limits at least every three years. For further questions or comments please call Council Services Plus at 1-877-501-4CSP (4277).
Peter Andrew is President and CEO of Council Services Plus (CS Plus) www.concilservicesplus.com, an insurance brokerage headquartered in New York State, dedicated to providing insurance and risk management services to nonprofit and nonprofit-related organizations. CS Plus is recognized by the New York Council of Nonprofits, the Louisiana Association of Nonprofit Organizations and is a supporting member of the National Council of Nonprofits and the Nonprofit Risk Management Center. For more information, contact Peter Andrew at firstname.lastname@example.org or (877) 501-4277, ext.125.