Q: In Directors & Officers Liability insurance (“D&O”) for my mission I notice a $5,000 Retention Limit on the policy declaration page. What is that and what does it mean to us?
A: Directors & Officers Liability insurance is an essential form of insurance that provides both defense and settlement for the mission’s Board of Directors and Officers (CEO, CFO, Executive Director, etc.) if there has been an allegation of a “wrongful act.” There need not have been any actual bodily injury or property damage arising out of the alleged act, but there must be an allegation of something that was done “wrong.” Since there is no standardized D&O insurance form that all insurers use, there is a great difference between good insurance policies and weak ones. Typical, in a good policy, there will be provisions that allow not only the Board to be protected but also the mission as an entity; that is, not only will each board member be protected individually, but so will the mission. An example of a claim that would likely need to be defended would be an allegation that an Executive Director should not have been hired by the Board if he/she is accused of some malfeasance, such as mishandling donations, a sexual abuse allegation, or some other bad behavior. All Boards ought to carry D&O insurance for at least $1,000,000. Premiums typically start around $750/year and are based on size of assets, number of board members, staff and volunteers.
A “Retention Limit” is similar to, but somewhat different from, a “Deductible.” In the case of a deductible such as contained within an automobile insurance policy, if you were involved in a collision, the deductible would be deducted from the collision repair estimate. You would then receive a check for the difference, even if you did not opt to have the repair completed. With a “Retention Limit,” your mission would need to pay this amount in order for the insurance company to even defend your mission against an allegation of a wrongful act, even if the allegations were groundless. This could be a surprise to you and put an unexpected expense in your cash flow. Typically, under the same policy, there is both a “Retention Limit” for the D&O coverage and a separate limit for the Employment Practices coverage. Therefore, based on the nature of the alleged wrongdoing, the same lawsuit could double the retention expense to your mission. Before opting for higher limits, carefully consider the benefit of a retention limit in light of the insurance discount it purports to provide.