Most organizations, especially nonprofit organizations, deal with donations and volunteer labor. Since they have tight budgets, they cannot cover unforeseen expenses that might deplete their funds. For this reason, having a board of directors insurance is crucial when dealing with legal cases or lawsuits. Additionally, this coverage offers financial coverage to the organization and its members and guarantees it can proceed with its objective without being uninterrupted.
Board of directors insurance is a risk management alternative for the liabilities arising from decisions made by a board of directors or officers nominated by board members. Occasionally, it’s known as management liability insurance since it offers coverage against various risks. Additionally, it covers claims and allegations of wrong management of finance and poor performance of official tasks or abiding by legal requirements. This article will explain what you must know about board of directors insurance, including its types, advantages, and more.
Types of Board of Directors Insurance
In addition to board members that investors make claims of wrongdoing, board of directors insurance covers spouses in the event clients, rival businesses, staff members, vendors, or other parties. The following are the three types of coverage offered by the board of directors.
A-side coverage
This section of the policy offers coverage to the board of directors’ properties if the defense or other expenses are added that the company is not mandated to compensate.
B-side coverage
This is typically known as corporate payment, which offers coverage to a business when it has reimbursed defense expenses and legal settlements for the board of directors.
C-side coverage
This coverage type, known as entity coverage, is a part of the policy that supports the company, along with the board of directors, as mentioned in a lawsuit. In addition, if there are specific claims filed against your company, this kind of coverage will cover it.
What Does Board of Directors Insurance Cover?
Since board of directors insurance is used to cover a company’s directors from lawsuits and financial responsibilities, there are other risks that it also covers. The following includes;
- Mishandle of business finance.
- False claims about the business assets.
- Fiduciary duty breach.
- Disregard for workplace regulations
- Lack of governance in the business.
The person who is suing the board of directors won’t be covered by an appropriate policy. It’s crucial to note that various parties, such as customers, vendors, investors, and even workers, may file a lawsuit against the company’s directors.
What Does Board of Directors Insurance Not Cover?
Most individuals might wonder what board of directors insurance does not cover. The exclusions of the board of directors differ between policies depending on the business requirements. In addition, the following are some claims that cannot be covered by a board of directors.
- Illegal behavior or earnings.
- Fraud.
- Individual gain.
- Litigation is both ongoing and completed.
- Previous assertions.
- Physical injury.
- Property damage.
Reasons for Suing Directors
Generally, boards of directors are sued due to their actions based on their tasks in the company. The following reasons may include:
- Loss of money or insolvency brought on by a fiduciary duty violation.
- False portrayal of the company’s assets.
- Mistakes in judgment.
- Corporate murder.
- Utilizing business funds for private benefit.
- Deception and poor administration.
- Breach of workplace regulations.
- Theft of intellectual property and customers from competitors.
- Poor corporate governance.
- Bankruptcies.
- Rival assertions.
Moreover, board of directors insurance does not cover an illegal act committed by a director. Any company that has a board of directors or an advisory committee needs to have this coverage. Furthermore, it is also essential that non-profit organizations get this coverage.
How Much Does It Cost?
The cost of the board of directors insurance differs depending on numerous factors like company size, industry, risk tolerance, financial standing, revenue, and claims history. When everything else is equal, companies with a longer history of operation will probably pay less than newer ones. Furthermore, the average yearly cost of the board of directors insurance for its clients was $1,240.
Do You Need Board of Directors Insurance?
A typical opinion is that the board of directors’ coverage claims are mainly a public business domain. In addition, public, private, and non-profit organizations experience litigation risks. Moreover, any business, especially a non-profit organization, should consider getting board of director insurance if they have a board of directors.
It is also not important for your company to generate incomes in the tens of millions of dollars for your directors to encounter personal lawsuits for their management of business issues. Furthermore, smaller businesses with few assets might mandate coverage just like a well-financed, significant company.
How to Get Board of Directors Insurance
Obtaining a board of directors is easy. Once the director fails to perform his duties, you can begin with the process. Common risks encompass professional misconduct, reporting errors, inadequate disclosures, insolvency, and regulatory non-compliance. For this reason, most claimants choose to file a claim with the director.
Furthermore, after notifying the director and the risk management departments about the claim, then give the insurance provider a description of the claim. The provider covers the defense expenses and any financial losses if the claim is covered.