Joining a board can be an exciting time that comes with important responsibility. It also comes with something else that directors don’t always consider: personal liability.
Directors who sit on a nonprofit or for-profit board open themselves up to the potential for risk, including risk that exposes them to personal liability that they alone are responsible for if a company cannot indemnify them.
If you’re on a board, don’t panic: there are additional measures you can take to protect yourself, which I’ll get into a little later. First, let’s look at the common claims against directors that you may not be aware of …
Common Claims Against Directors
While it is unusual to see suits brought against directors of non-profits , it can certainly happen. Specifically for non-profits, the majority of the claims relate to employment practices issues. Regulators, attorney generals and others can also sue nonprofits. In some cases, directors may be sued personally.
Private Company Directors
Private company directors face a greater degree of risk when it comes to being sued personally. Breach of fiduciary duty suits brought by shareholders, actions brought by bankruptcy trustees and even proceedings brought by government regulators are all possibilities when it comes to personal liability for private company directors.
Public Company Directors
Public company directors face the greatest degree of risk, both from a frequency and a severity perspective. In addition to all the risks faced by private company directors, public company directors are also faced with the possibility of their shareholders naming them in a federal securities class action lawsuit.
Indeed, this risk seems to be on the rise: a record number of these types of suits were filed in 2015.
Keep in mind that there are other boards you can sit on that expose you to risk, too, such as school boards and homeowner’s association boards.
Whatever the case may be, board members can—and sometimes are—individually named in lawsuits. What comes next is how the company and individual can respond.
How Directors Can Respond
Typically, the organization where you serve on the board will purchase a D&O insurance policy to protect its directors. But what if the purchased policy limit is inadequate?
Let’s say your board faces a $5 million breach of fiduciary duty claim, and the lawsuit names all the directors individually. But the company only has a $1 million policy (a standard policy limit amount for smaller companies). What happens next?
No director wants to see the plaintiff go after him or her personally. To avoid this, consider purchasing an extra layer of protection, one that you don’t have to share with anyone else. This extra layer of protection is sometimes referred to as a wealth security policy.
Wealth security policy coverage extends to:
- Wrongful acts in your capacity as a director
- Wrongful acts in your capacity as a ERISA fiduciary
A wealth security policy can respond on your behalf if your company’s D&O insurance policy becomes exhausted and your company cannot indemnify you. It’s a policy you, the director, purchase on your own to protect your individual assets.
Best of all, you can purchase a wealth security policy both for your for-profit and non-profit boards, so long as the underlying company purchases some D&O insurance.
Wealth security policies are especially useful for directors of for-profit companies since your personal umbrella policy only covers your service on non-profit boards.
Note that not all personal umbrella policies cover a person for their service on non-profit boards; you will want to speak to your trusted advisor to confirm that you have this coverage.
Bonus: run-off coverage for up to six years can be purchased in the event a company is sold, you exit a board or the company goes bankrupt.
The standard limit for a wealth security policy is $1 million in coverage, but you can purchase higher limits if needed. And the good news is that’s it’s a reasonably priced policy, especially compared to public company D&O policies (but it does vary depending on your risk profile).
The standard for an independent director who sits on multiple non-profit and for-profit boards is about $3,000 per $1 million of insurance coverage.
So, if you’re considering joining a board or already sit on one, it’s time to think about the added exposure you face. Adding a wealth security policy can respond when other coverage doesn’t.