Don’t Let Your D&O Lapse!
Vol. 15 No. 1
The nonprofit North Carolina New Schools Project, started 13 years ago with an $11 million grant from the Bill and Melinda Gates Foundation, had a mission of restructuring early-college and specialty public high schools. When the five-year grant from the Gates Foundation ended, New Schools solicited funds from various sources, including other private foundation grants and federal and state money.
The organization spread to schools in other states, and added Breakthrough Learning to its name. The nonprofit successfully transformed many small public high schools into stronger early-college institutions.
This past April, however, the organization closed its doors, suffering from significant financial problems. Despite a $20 million federal grant in 2014, New Schools could not rectify its cash flow issues. It filed for bankruptcy with a debt of $1.5 million more than its assets.
But the Board of Directors soon discovered that their problems went beyond bankruptcy. The Board’s Directors and Officers (D&O) insurance had lapsed, exposing the Board members and especially the organization’s top officers to potential lawsuits and legal claims. The $1 million policy lapsed in 2015, unknown to the Board of Directors.
Although private-independent schools rarely lack D&O insurance, it is prudent to be aware of your insurance’s cost, limits of coverage, policy specifics, retroactive date and exclusions—and, of course, its renewal deadline.
D&O insurance is likely the most critical insurance and protection for your school. Having the “wrong” policy or one that is weak could potentially be devastating to your school.
Damages sought under D&O insurance can range anywhere from a nuisance claim to one seeking millions of dollars in compensation. These may include a request for punitive damages if the action in question is egregious enough (e.g., willful disregard for protected ADA categories or where the school knew of a wrong action that was occurring and did nothing to stop it).
The cost to protect and defend a school against such claims can often cost $75,000 or more in legal fees just to prove nothing wrong occurred. Your policy must not only cover both losses and defense costs, but provide added limits for defense, and not erode claims limits should the plaintiff prevail.
Your D&O policy should cover risks or exposures, such as:
- all manner of employment practices liability including wrongful termination, wrongful hiring, discrimination, harassment, and misrepresentation;
- entity coverage;
- duty to defend costs in addition to the limit/right to settle or not settle punitive damages (where allowed by state);
- third-party coverage;
- sexual misconduct coverage/workplace violence coverage;
- internet liability coverage/fiduciary coverage; and
- educational wrongful acts coverage.
Recognize what risks or exposures are covered and will “trigger” protection. Equally important, however, is knowing what is not covered. General exclusions include willful acts or intentional misconduct; criminal acts, war, terrorism; and environmental/pollution exclusions. Sexual molestation claims and coverage for claims around concussions are also being limited, or excluded.
Also, be certain you know what actions you should take (duty to report) when presented with a claim (or even a threat or complaint), versus what actions might complicate the defense, or even invalidate your coverage.
Review you D&O policy each year with your agent. You may even consider “going to market” by conducting a formal request for proposal (RFP). This process typically invites your current broker and others to bid on this coverage. If done well, you will learn more about this coverage simply by going through the process. But, whatever you do, don’t let your insurance lapse!
Additional ISM resources for Gold Consortium members:
I&P Vol. 40 No. 7 The Board and Employment Practices Liability Insurance
I&P Vol. 35 No. 9 How to Scrutinize an Insurance Policy