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Directors and Officers Liability Insurance

by Doug Bechtel

The Actors Theater of Orcas Island

About the Author

Doug has been CEO of non profit cooperative corporations for 25 years and has served on dozens of non profit boards. He is currently President of The Actors Theater of Orcas Island, which was founded in 1999. He is also a founder and current Secretary of The Orcas Island Community Foundation, and has recently served on the following non profit boards: The Orcas Island Medical Center Association, The Orcas Island Sportsmans Club, the Kiwanis Club and the Chamber of Commerce. Active in the theater since 1996, Doug has been producer, director, actor, techie and anything anyone would let him do.



There is probably not a community theater too small to need Directors and Officers Liability Insurance. If you do not have it, you need to look at purchasing it; if you do have it, you need to read the policy. It is likely there have been coverage changes in the last couple of years.

Lets start at the beginning: What is D & O Insurance? D & O Insurance provides funds to defend and indemnify the Directors or Trustees of your theater in the event they are personally sued as a result of their service on your board. Most state statutes do a pretty good job of insulating volunteer directors of non-profit organizations from the consequences of their actions (as long as they were made in good faith). That is not to say that you, as a director of your community theater, cannot be sued.

Historically, the courts have been reluctant to substitute their judgement for the decision of a board member as long as the board member reached his or her decision in a reasonable manner. Directors are expected to use the same amount of diligence they would use making a similar decision in their personal life. As a classic example, would you buy a house to live in without looking at it, relying instead on the recommendation of your spouse or the real estate agent? As a director of your theater, did you vote to buy a new building without visiting it, relying instead on the recommendation of the Executive Director or a board committee? This is called due diligence. The courts will also look very closely at any decision you make where you have a financial interest in the outcome (like you own the building your theater is buying). The courts may also look at how you, as a director, ensure that your theater is operating properly. For example, if you have a sexual harassment policy, how does the board insure that the policy is being followed and the employees are being protected from sexual harassment?

Let me give a couple of examples where Directors of a non-profit corporation were sued (none of these were theaters). 1) A non-profit board was sued for not having enough liability insurance. 2) A non-profit board was sued for board election irregularities. 3) A non-profit board was sued to block the purchase of an office building. 4) A non-profit board was sued because the board did not insure that existing board policies were being followed. While I do not know the outcome of these lawsuits, one of the primary benefits of having D & O insurance is to pay the cost of attorneys to defend the director. If you are sued because you are a director of your theater, the cost of the litigation - even if you are ultimately proven innocent - can be significant. In the event that you, in your job as director, are found in the wrong, the policy may pay any financial penalty assessed.

As you consider D&O insurance, you need to look at how to protect the director after he/she is off the board for actions taken while on the board. Some policies may cover this directly. I worked for a non-profit (not a theater) that signed a contract with each trustee when they joined the board that guaranteed to cover the expenses of litigation for lawsuits whether they were still on the board or not.

One final comment: D & O Insurance does not cover all lawsuits. Different policies have different exclusions so there is no hard and fast rule on coverage. Things that may not be covered: Wrongful termination, pollution, decisions contrary to law and intentional misconduct. I have recently heard of policies that do not provide insurance for events where alcohol is served.

Another final comment: D & O Insurance varies in price based on coverage and the perceived risk by the insurer. I know non-profit organizations which pay several hundred dollars a year for coverage and other organizations that pay $5,000 to $10,000 a year.

A caveat: I am not an attorney or insurance specialist, just a community theater afficionado. You need to talk to someone with more knowledge if have questions or need more information.


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