Bankers Service on Nonprofit Boards

What if you get sued for a decision you make while serving as a director of a local charity?

Service on nonprofit boards is certainly common for community bankers. What insurance protection is provided by your bank’s current directors’ and officers’ insurance for your nonprofit service?

Sample Policy Sections

Most banks buy directors’ and officers’ insurance policies that are designed for banks. The policies almost always provide some coverage for bank officers. Here is one insurer’s policy language:

‘This Policy shall cover Loss resulting from Claims for Wrongful Acts committed by Insured Persons while serving on the board of directors, board of trustees, or as officers of any not-for-profit entity at the direction of the Company; provided, however, that this coverage shall be excess over any other insurance and indemnification available to the Insured Persons.”

Here’s another insurer’s version:

 “Coverage otherwise afforded under Insuring Agreements A. Insured Persons Liability and B. Financial Institution Indemnification is extended to also apply to Loss resulting from Claims for Wrongful Acts by Insured Persons while serving on the board of directors, board of trustees, or as officers of any not-for-profit entity at the direction of the Financial Institution; provided, however, that this coverage shall be excess over any other insurance or indemnification available to the Insured Persons, including without limitation any insurance or indemnification available from or provided by such not-for-profit entity.”

 And, policy language from a third:

“(Coverage applies) to any claim against any Director or Officer arising out of his or her service as a director, officer, member, manager, trustee, regent or governor of any not-for-profit organization; provided, however, that the Insurer shall not be liable to make any payment for loss, including defense expenses, in connection with any claim brought by or on behalf of or in the name or right of any not-for-profit organization with respect to such Director’s or Officer’s service to such organization and that the coverage provided under this SECTION 2.(A) will apply only as excess of

1)     any indemnification from the not-for-profit organization available to such Director or Officer by reason of such service; and

2)     any insurance of the not-for-profit organization available to such Director or Officer by reason of such service.”

 

Common Themes

Several common elements run through the above:

The wrongful act must arise out ofservice to a nonprofit

The entity the bank director or officer is serving must be a nonprofit; the definition of which is left to common usage. United Way, Boy Scouts, Rotary, Kiwanis, and the local YMCA are examples that would almost always fall within the coverage. A trade association or a chamber of commerce may or may not qualify as a nonprofit. When in doubt, talk with your insurance company.

The service must be at the direction of the bank

Two of the three examples above require that the service be at the direction of the bank.  A bank officer who is a trustee of a church may not meet this test.  Serving on the board of the local little league may also be problematic if there is no suggestion by the bank that the officer perform such voluntary service.  Periodically have officers and directors of the bank report their community service.  With such information the bank can decide what service it wants to have included.

Coverage is excess over any indemnification by the nonprofit

Most corporate bylaws include a provision for indemnification of officers and directors.  In other words, if a director is sued, the nonprofit will provide protection for the directors using the assets of the entity.  Those assets must be completely depleted before your bank D&O will step in.

Coverage is excess over any available insurance to the director

If the nonprofit has D&O insurance, the bank’s D&O will be excess.  The nonprofit’s insurance pays first.

 

Bottom Line

Bank D&O insurance is a third line of defense for bank directors and officers when it comes to nonprofit service – behind the nonprofit’s D&O insurance and assets.

Any claim payment (including defense costs) used to pay for an outside directorship will reduce the coverage available under the aggregate limit of coverage. Coverage used for nonprofit claims will not be available for other claims.

Lastly, some D&O policies limit outside directorship protection to the D&O side of coverage.  Employment practices liability insurance may be a separate policy that does not include the coverage extensions outlined above.