Guide to Directors and Officers Liability Insurance

For boards of directors, trustees, and foundation managers, there are few areas of operation that cause more confusion and uncertainty than indemnification and the purchase of directors and officers (D&O) liability insurance. And it is no wonder. Mixing the often impenetrable statutory language of the Internal Revenue Code with the highly refined wording of insurance policies creates fertile ground for confusion. To make matters worse, the rules are not static. State laws change, Treasury regulations are revised and insurance policy language is frequently amended.

Over the years, members of the Council on Foundations have raised a steady stream of questions about potential liability, indemnification, and the purchase of D&O insurance. These questions have taken on more urgency as increased scrutiny of directors of for-profit corporations has led many state regulators to focus their attention on the behavior of nonprofit officials as well. Foundation managers increasingly recognize that their leadership roles come with potential risks, and they want to know how to protect themselves and the foundations they serve.

This paper seeks to address these concerns. It brings together background information on relevant state laws, the insurance industry, and Treasury Department regulations, for those who are approaching these issues for the first time and for those who seek to update and deepen their knowledge.