Why Is the Form of D&O Insurance Important?

Eric Eggert, Business Development Specialist
Mackoul Risk Solutions

The Lay of the Land

Your directors and officers (D&O) insurance is the main policy that covers you as a board member. D&O can come in different forms. You can add an endorsement to your main package policy or you can have a separate stand-alone D&O policy. Generally speaking, the majority of D&O coverage that is added to the main package is insufficient and is lacking major coverages.

Let’s look at a situation that seems simple but actually carries a lot of risk. Let’s say that you allow Ms. Smith to have a flower planter hanging from her window. Mr. Jones likes the way it looks and decides he wants one too, but you tell Mr. Jones to take his down because having anything in the window is against the rules. Mr. Jones can now sue you and your fellow board members, claiming gender discrimination – even if your reasoning has nothing to do with him being a man and Ms. Smith being a woman. It is very important to stay consistent in all your decisions. What seemed like a small issue is suddenly large – and headed to court.

Whether you fight or settle in a case like this, your legal fees will add up. If you have the D&O endorsement, chances are you’re not going to be covered for your legal defense in this example. If it’s not covered, you’re left with two choices: you can dip into the building’s reserves to pay for the legal defense or you can assess the unit-owners. But if you have the separate stand-alone policy that is written properly, your legal defense should be covered.

Now What?

This underlines why it’s important to review your insurance. Just because a policy is less expensive, that doesn’t make it the right one for you. You might only be paying a couple hundred dollars for the endorsement, where you could be paying $1,000 or more with a separate stand-alone policy. The premiums are based on the number of units and previous claims history.

We strongly recommend obtaining a stand-alone D&O policy because it includes a lot more coverage. The less expensive embedded policy, generally speaking, is going to exclude a lot of the main coverage found in typical lawsuits (discrimination, harassment, wrongful termination, non-monetary damages). It just doesn’t make sense to leave yourself, your board, and your association exposed to this kind of risk just to save a few hundred dollars a year when one claim will cost you a lot more than you were able to save with the inferior coverage.