During the last few weeks the newspapers have had various articles about the acts of members of boards of trustees and directors of organizations. The articles have not specifically addressed insurance coverage, but one conclusion is mandatory. No one should agree to serve on a board unless she is sure the board has a Directors and Officers (D&O) policy with adequate limits of liability for all directors’ acts while serving as members of the board.

The D&O policy may provide coverage for those who are directors and officers of any board, whether huge or small, non-profit associations and charities. The policy provides coverage including indemnity and defense of claims against individual directors and officers, and reimbursement for the organization that is obligated to indemnify the directors, and for the organization itself.

The D&O policy and the corporate or association bylaws must be read together. Normally, bylaws provide very broad indemnity obligations to the directors and officers for all acts permitted by law on behalf of the entity. Although the policy is the mechanism to pay for the defense of a claim against a director or officer, either the organization or the insurer may initially pay for the defense. If the organization pays in the first instance, the indemnification portion of the policy obligates the insurer to contemporaneously reimburse the entity for all losses, including defense costs as permitted or required by the entity’s bylaws.

Uniqueness of D&O Coverage

The D&O policy is an errors and omissions “claims made” policy. The entity is considered the named insured. It usually has three distinct coverages. Each coverage has a separate retention or deductible.

“Management Liability” applies to the directors, officers and employees or any “insured person” whom the insured entity is legally obligated to indemnify as a result of a “claim” first made against the “insured person” during the policy period or extended policy periods. The coverage applies to the directors, officers and employees of the organization.

The “Organization Reimbursement” applies to the organization’s indemnification reimbursement obligations to the “insured person.” Frequently the corporation’s bylaws require a corporation to indemnify its directors and officers to the fullest extent of the law. The indemnification obligation may be broader than the coverage provided by the insurance policy. If so, the entity must pay part of the director’s defense.

The ‘Organization Liability” applies to the organization’s “wrongful acts.”

As in all policies, the duty to defend is different from the duty to indemnify. In the D&O policy, the duty to defend continues until there is a negative adjudication that the alleged wrongdoing is excluded from coverage.1 A director is entitled to an immediate defense. The insurer may either pay the defense directly or reimburse the organization for any payment the organization makes related to or on behalf of the director’s defense. The insurer’s duty to reimburse the directors and officers as the defense obligation attaches is not speculative. The insurer’s failure to reimburse the insured “constitutes a direct, immediate and irreparable injury, as it would deprive the insured of the benefit bargained for through payment of the policy premium.”2 At the end of the litigation if the insured director is found guilty of acts excluded by the policy, the insurer may recoup the funds expended to defend the individual defendant and litigation costs may be allocated between covered and uncovered claims.3 It is essential for anyone serving on a board to be familiar with the bylaws as well as the terms of the policy.

Every D&O policy has a retention or deductible amount that cannot be insured. The retention amount is not generally significant, but can be as high as $50,000 per claim. The insured entity, not the individual director, is responsible for the deductible. The cost of defense may be included as part of the Limit of Liability. D&O claims tend to be very expensive to litigate. The entire policy may be exhausted just by litigation costs. Every organization has different needs, so policy limits and deductibles must be considered.

The coverage applies to a “wrongful act” to “claims” first made against the insured person or organization during the policy period, extended reporting period or supplemental reporting period. Every D&O policy has a severability provision. “A wrongful act” committed by any “insured person” shall not be imputed to any other “insured person” for purposes of applying any exclusions.

It is very important that the insured not settle a claim or pay any settlement amount without the insurer’s written approval.4 If the insured does, it is at the risk of having no coverage, since the insurer may refuse to fund the settlement. The insurer may settle any claim only upon the written consent of the insured. If the insured withholds consent the insurer’s liability will not exceed the amount the claim could have been settled for. The insured will be responsible for payment of the amount in excess of the amount at which the claim could have been settled.

Exclusions in a D&O Policy

The D&O policy contains various exclusions, but is unique in that defense coverage must be provided until the insured is found liable by a court or some other legal entity for the exclusionary acts. At that time the insurer can insist upon an allocation between covered and uncovered claims asserted against an insured if the insurer has reserved its rights.5 In New York the insurer has the burden to prove what is not covered.6 The insurer may also recoup attorney fees and defense costs if the exclusions are found to apply.7

Exclusions fall into various categories. One category relates to criminal acts including but not limited to those related to fraud, dishonest, malicious acts, violations of statutes and regulations, and personal profit for which the director or officer is not entitled. A second category may relate to violations of the Employee Retirement Income and Security Act (ERISA), securities law or shareholder derivative actions. Some policies specifically provide coverage for securities violations. There is generally no coverage for claims by one insured against another insured. The D&O policy frequently excludes coverage for employment-related or known discriminatory acts. Claims, circumstances or lawsuits which were or should have been reported under prior policies are excluded as they are in all other insurance policies.


It is obvious that no one should serve on any board unless she is sure there is D&O coverage for all acts on behalf of the organization, that the coverage limit is adequate and the organization will pay the deductible. It is also important to know whether the board member, the entity or the insurer will appoint counsel. The board member must also review the organization’s bylaws to determine whether the board will indemnify him for all acts permitted by law. The director should monitor the attorney fees so as to be sure there will be money available for valid settlements, if necessary.

Sue C. Jacobs is a member of Goodman & Jacobs.


1. Dupree v. Scottsdale Ins., —N.Y.S.2d.—, 2012 WL 2146311 (N.Y.A.D. 1st Dept.), 2012 N.Y.Slip.Op 04839.

2. Id.

3. Id.; PepsiCo. v. Continental Casualty, 640 F.Supp. 656 (S.D.N.Y. 1986).

4. Continental Casualty v. Ace American Insurance, 2009 WL 857594 (S.D.N.Y. 2009); Day v. One Beacon Insurance, 11-03391 —A.D.3d— (4th Dept. 2012). 7/6/12 NYLJ.

5. Dupree v. Scottsdale Insurance, supra; citing Federal Ins. v. Kozlowski, 18 A.D.3d 33, 42 (1st Dept. 2005).

6. PepsiCo v. Continental Casualty, supra.

7. Dupree v. Scottsdale Insurance, supra.