The Limit to the Question of Limits

Reader Question:

Hi Scott –

I have read your articles at Guidestar and on your site about D&O for nonprofits. What I can’t seem to find is what criteria to use to determine the limit. I’m part of a nonprofit COO group on LinkedIn and asked others in the group. The few answers I received indicated that limits were suggested by the Board in relation to how risk averse certain individual board members were.

I’d like something a bit more analytical and my board is looking to me to help them analyze and assess their risk. Going from a $2M to a $5M limit increases our premium pretty significantly, so I’d like to make sure that it is called for. Any guidance you can give?

My Reply:

This is the most common question I get.

There are no quantitative answers – past a minimum level.  Anyone who gives you a formula is making stuff up.

I have reviewed your financials.  To me, $5m is a minimum for you.  Your assets and the overall operations tell me you are well past the $2m point.

Beyond $5m I recommend a value based approach.  How much is the next million and is it worth it to you and the board?  If the 6th m cost $500 you buy it.  If it’s $5,000 you probably don’t buy it.

Sorry I have no magic formula.  It just does not exist – beyond superfluousness. 

More important than the 5 to 6 million decision is the quality of your coverage.  Is the coverage what it should be?  What exclusions exist?  Can you get a better policy at a better price with another insurer?

Glad to help more if I can.