What Is Board Insurance?

Board liability insurance, also referred to as directors and officers (D&O) liability insurance, can help protect a company’s leadership from personal financial losses and legal costs should they be sued for mismanagement, breach of duty or alleged wrongful acts, depending on policy terms. This type of D&O coverage is a core component of management liability insurance for many organizations.

Board liability insurance has become more critical in recent years due to a steady increase in regulatory scrutiny, high-stakes litigation, employment practices liability and rapidly evolving business risks, such as cybersecurity and fraud. Board insurance is also important for attracting and retaining experienced directors and officers, as many qualified individuals are hesitant to serve without proper protections in place.

Who Needs Liability Insurance for a Board of Directors?

Board insurance is important for any organization with a governing body, including:

• Public companies – Public companies face intense scrutiny from shareholders, the media, customers, competitors and regulators, which can make them a prime target for securities-related lawsuits and other legal action. D&O liability coverage helps protect both the entity and board members in these situations.

• Private companies – A common misconception is that private companies don’t need D&O coverage because they don’t have public shareholders. In reality, private companies face similar risks and can be sued by employees, competitors, customers and regulators — particularly for employment practices liability issues such as wrongful termination.

• Nonprofits – Board liability insurance can help protect nonprofit organizations and nonprofit directors from lawsuits regarding their fiduciary responsibilities, employee practices, regulatory compliance, reporting, use of funds and more. If you’ve recently been asked to serve, Creative Planning’s articles “Invited to Sit on a Nonprofit Board?” and “Best Practices for Running an Effective Nonprofit Board” offer helpful context.

• Startups – Startup companies typically have limited financial resources, yet their unproven track records can put them at a higher risk of lawsuits and mismanagement claims, making D&O coverage an important consideration in their risk management strategy.

What D&O Liability Insurance Covers (and What It Doesn’t)

D&O liability insurance generally covers risks that stem from decisions made by an organization’s leadership. It’s designed to help protect both the personal assets of board members and the company’s assets from legal judgments arising from alleged wrongful conduct.

Key exclusions (what’s not covered)

D&O liability coverage doesn’t take the place of general liability, umbrella or professional liability insurance. Common exclusions include:

• Bodily injury and property damage – Personal injury claims from accidents on the company’s or nonprofit’s premises and damage to physical property are typically addressed under general liability or umbrella insurance coverage, not D&O insurance.

• Intentional fraud and criminal acts – Insider trading, embezzlement and deliberate illegal activity aren’t covered once such conduct is established.

• Insured vs. insured claims – Many policies exclude lawsuits between current directors or officers and lawsuits against the company by its own executives.

• Professional errors and omissions – Malpractice claims against professionals within the organization and errors in providing services to clients are usually handled by separate errors and omissions (E&O) or professional liability policies, not D&O coverage.

• Prior/pending litigation exclusion – Policies generally exclude claims arising out of litigation, investigations or administrative proceedings that were already underway as of a date specified in the policy, often the date coverage first incepted. Depending on how the exclusion is worded, later claims arising from the same underlying facts or circumstances may also fall outside coverage.

• Prior acts/prior knowledge exclusion – Policies typically exclude claims arising from wrongful acts that took place before a stated retroactive date, or from circumstances an insured was already aware of and could have reasonably expected to result in a claim, before the policy took effect. This is one reason accurate application disclosures and close attention to the retroactive date matter when placing or renewing coverage.

Key Policy Terms and Limits to Understand

When deciding what type of board liability insurance is right for your organization, it’s important to understand common policy terms and limits:

• Alternative dispute resolution (ADR) provision – ADR provisions may require binding arbitration or nonbinding mediation when coverage disputes arise. Typically, an ADR clause requires that the insured attempt to resolve disputes out of court before engaging in litigation.

• Insured vs. insured exclusion – This provision denies coverage for lawsuits brought by one insured individual against another insured individual. The purpose is to avoid payouts related to collusive lawsuits that don’t meet the criteria for third-party liability claims; this often applies to claims brought by one director or officer against another, or by the company itself against its own directors or officers.

• “Hammer” clause – A hammer clause allows the insurance company to establish a limit for settlement and defense costs if an insured refuses a settlement offer that’s recommended by the insurer. If the insured decides to litigate after rejecting a settlement offer, the insurer’s financial liability is typically limited to the settlement amount plus any defense costs incurred up to that point.

How Much Board Insurance Do You Need?

D&O coverage limits typically range from $1 million for small businesses to more than $10 million for large, public companies. These figures are general reference points rather than fixed tiers. In practice, limits are usually benchmarked against organizations of comparable size, revenue and industry, along with the current claims and litigation environment, rather than selected from a standard schedule. The right amount of coverage your company or nonprofit board needs depends on several factors, such as:

• Company size and stage – Early-stage companies start with limits in the $2 million to $3 million range, while large and rapidly growing companies may need $10 million or more in D&O coverage. Typically, as your assets grow, so should your coverage.

• Public vs. private – Public companies often require higher limits due to the increased potential for shareholder actions and regulatory scrutiny.

• Industry type – Industries that maintain lots of confidential data, such as healthcare, finance and tech, face higher risks and more potential claims, which may require higher D&O coverage amounts and complementary cyber and fiduciary liability coverage.

• Financial strength – Companies with illiquid balance sheets and limited cash flow may need higher limits to protect their financial interests.

• Employment practices – Companies that maintain large workforces or experience frequent layoffs may require additional coverage to protect against employment practices claims.

• State laws – Certain states have D&O coverage expectations or regulatory frameworks that should inform your policy decisions.

Common Pitfalls and Mistakes to Avoid

When implementing a D&O insurance policy, it’s important to carefully evaluate your customization options, reporting timelines, policy exclusions and coverage coordination. Common mistakes include:

• A lack of coordination with other insurance – Failing to integrate a range of insurance policies can lead to unintended gaps and result in financial losses and high legal fees. For example, if your D&O policy excludes professional services coverage and your E&O policy excludes management decisions, you may find yourself in a situation where a wrongful act claim isn’t covered by either policy.

• A broad insured vs. insured exclusion – If your policy’s definition of “insured” is too broad, it can result in an insured vs. insured exclusion that prevents coverage for lawsuits between company directors. It’s important to negotiate carve-outs for specific claims, such as bankruptcy trustee lawsuits and shareholder derivative actions.

• Reporting failures – A common mistake is failing to promptly report claims or potential claims to the insurer. D&O coverage is typically claims-made, which means coverage is generally triggered by notifying the insurer within the stated policy period. Delaying notice can lead to a denial of coverage. Two related mechanisms are worth reviewing with a qualified insurance professional: the policy’s retroactive date, which generally determines how far back covered wrongful acts may reach, and an extended reporting period — often called tail coverage — which may allow claims to be reported for a defined window after a policy ends or isn’t renewed. Availability, length and cost of these features vary by carrier and policy terms.

• Side A coverage gaps – Side A coverage protects individual directors and officers when the company can’t (or won’t) indemnify them, such as in the case of insolvency. Limited or absent Side A protection can leave your organization’s key leaders personally exposed to defense costs and settlements, depending on the circumstances.

• Side C coverage gaps – Side C “entity” coverage responds when the organization itself is named in a claim. As noted above, the scope of that coverage generally differs between public companies and private companies or nonprofits, so it’s worth confirming what a specific policy’s entity coverage actually includes. Without entity coverage in place, your organization may be responsible for the legal expenses associated with its own defense.

• Choosing price over coverage – While cost is an important consideration in any business decision, focusing too much on the policy’s cost may result in broad exclusions that leave gaps you didn’t anticipate. This approach could end up costing more in the long run if you experience significant out-of-pocket expenses due to a gap in coverage.

Working With an Advisor to Evaluate D&O Coverage

Because D&O terms, definitions, exclusions and endorsements vary so widely, board liability coverage is generally best evaluated with the help of an experienced wealth manager and insurance professional. Your wealth manager can help you consider how a policy fits with your company’s overall financial goals, while your insurance advisor can serve as an intermediary with the insurance company to negotiate terms and clarify what a policy does and doesn’t cover.

At Creative Planning, our business insurance services team provides a broad range of business risk management and consulting services, with the ultimate goal of protecting what’s most important to you. We start with a detailed risk analysis designed to identify the specific risks facing your organization, then we evaluate and negotiate coverage — including board insurance, umbrella insurance and other liability insurance options — aligned with your organization’s circumstances. And, because we serve as a fiduciary, you can be confident the advice you receive is always guided by your best interests.

To get started, please schedule a consultation with a member of our team. We look forward to getting to know you.