Are Your Board Members Protected For Decisions They Make?

What is Directors & Officers liability coverage?

Directors & Officers liability coverage protects your church entity and church leadership as they move the ministry forward through leadership decisions. It is analogous to an errors and omissions liability policy designed for your leadership. It is designed to protect both the church entity and the individual leaders for their leadership decisions that result in allegations of a perceived violation of a right, or allegations claiming loss by virtue of their decisions.

There are some myths surrounding the need for Directors & Officers. Some feel that charitable immunity laws or the Volunteer Protection Act of 1997 are enough to protect churches and leaders in accusations of breach of duty. To be clear, there are some protections within these regulations; however, they only protect to a certain point, and church leadership are still accountable for solid, well-reasoned leadership decisions.

It is also a common misconception that General Liability coverage is enough for a church. General Liability is designed to protect against acts of negligence where people may be physically injured or where property is damaged. Directors & Officers coverage instead responds to even intentional acts, where decisions were made but the result was perceived as a wrong or violation of duty, and the accuser is looking for monetary compensation or some other type of relief.

Why does your church need it?

Your church is in the people business, and your leaders are making decisions that affect people, whether it be employment issues or how to distribute church funds. Working to help people can create differences of opinion and emotional responses. A recent statistic shows that 70% of D&O claims result from people-related decisions.

Another point churches should keep in mind is that when lawsuits are filed they do have to be defended, which will cost the church money in the form of legal fees. It does not have to be true to end up in court. The average cost for a nonprofit D&O/EPL claim is $150,000. Many churches do not have monies set aside to handle these types of expenses. In fact, 85% of nonprofits have budgets that are less than $150,000.

Church leaders do make mistakes in leadership decisions at times. There can be a "breach of duty" either intentionally or unintentionally. Some common examples include mistakes in how real estate transactions are handled, mistakes in how construction projects are handled, mistakes in the use of funds, and mistakes with how employees or volunteers are treated.

Directors & Officers coverage is not mandated by law like Workers' Compensation coverage. However, within your church charter there is probably language which states that the church will indemnify the Directors & Officers of the church if a suit should include them as individuals. Details are typically not given as to what source of funds would be used to pay for this indemnification and/or defense. Legally, however, the church is responsible to follow through with this promise of indemnification. This makes the Directors & Officers policy a cost-effective tool to enable the church to meet that legal obligation.

Who is protected?

Directors & Officers policies differ from company to company, and policies can have different definitions of who is considered an insured. It is worth reviewing the specific language of the policy to make sure the definition of insured includes all the correct parties and is as broad as possible.

The policy should be set up to protect two distinct groups: the church entity and the individual leaders. Because churches are made up of various paid and volunteer leadership levels, make sure the definition of leader is broad enough to encompass the appropriate leadership base in your church, whether paid or volunteer.

A D&O policy is typically set up with three insuring agreements, or "sides":

Side A — Provides loss and defense costs coverage to individuals when not indemnified by the church. Side B — Provides loss and defense costs coverage for the church entity when it indemnifies the individual leaders (reimbursement). Side C — Provides loss and defense costs coverage for the church entity.

What should I look for in my coverage?

When you are reviewing your policy, be sure that the insuring agreements and definitions are broad enough to encompass the structure and ministry of your church. Some key terms to look for include:

• Defense Costs Outside the Limit of Liability — Legal fees and defense costs should not erode your available limit. With defense costs outside the limit, they do not lessen the limit available if the suit goes to judgment and a payout is required.

• Broad definition of who is an "Insured" — The definition should include all appropriate parties within leadership, both volunteer and paid.

• "Full prior acts" — Allows coverage to respond to claims arising from the past, potentially even before you purchased the policy.

• "Pay on behalf" vs. "Reimburse" — Agreement that the insurance company will pay first instead of individuals waiting to be reimbursed after paying themselves.

• "Duty to defend" — Broad agreement by the insurance company to research and defend allegations even if claims are far-fetched or frivolous.

Your church's leadership works hard to do the right thing, keep true to their duty as leaders, and help make a difference. Directors & Officers coverage is a cost-effective and accessible method for the church to protect both itself and its individual leadership.

To review your board's protection, contact Ministry Insured, a division of Emery & Webb, Inc., at 800-318-6717.

Please note that this article is for informational purposes only and is not intended to provide legal advice or a complete explanation of Directors & Officers insurance coverage. Please refer to your specific insurance policies for complete explanations of coverage.