What is Outside Directorship Liability, commonly called ODL Coverage?
Most D&O policies contain coverage for what is known as Outside Directorship Liability, commonly called ODL coverage. It protects executives when they sit on the boards of organizations outside of the insured firm when the insured firm requests that they do so.
In the small and medium-sized business insurance market, the ODL extension is limited and only extends coverage to the executive’s service on not-for-profit boards. In these situations, for-profit board exposures are not covered.
In the larger business market, the ODL extension can include for-profit board service in addition to non-profit board service.
There are a few issues to think about when you’re an executive being asked to join an outside board at the direction of your firm, and these comments apply to any individual considering an appointment to a board – whether for profit on not-for-profit.
First, what does the outside organization’s D&O protection look like?
- What limits of protection do they have?
- Do they even have D&O insurance?
- How does the organization’s board address the indemnification of officers and directors if a D&O claim arises?
- Has the D&O insurance been reviewed by an outside expert to determine sufficiency and accuracy?
While any outside organization’s by-laws or organizational charters typically do provide indemnification of D’s & O’s, it’s important to verify that and verify the insurance protection they have.
If your firm has asked you to sit on that outside board, the firm’s ODL protection is limited as I will explain in a moment.
But more important for your firm and your own D’s & O’s is the fact that if multiple leaders in your firm are sitting on outside boards at the direction of the firm, there is the potential that claims from outside activities could impair your firm’s D&O limits. ODL claims will roll up into your firm’s aggregate limits of protection.
That’s why any executive sitting on an outside board should report actual or potential claims to their firm’s GC or Risk Manager to track potential threats to your D&O limits.
In addition, I recommend that your GC and/or Risk Manager also review the outside organization’s indemnification provisions and D&O policies for acceptability before accepting a position.
The Outside Directorship Liability extension regardless of the size of your firm will have three limitations:
The first, as mentioned earlier, is that the request for an executive to sit on a board must be specifically directed by your firm. If you elect to serve on the board of your condo or co-op association, your company’s Outside Directorship Liability extension within their D&O policy does not come into play.
Second, coverage for Outside Directorship Liability is provided on a blanket basis and subject to your firm’s policy limits or potentially specific sub-limits for ODL. Further coverage is provided in most cases on an excess basis.
That excess can be double excess or triple excess. Double excess means that your firm’s D&O policy doesn’t kick in until after the outside organization’s D&O limits of coverage are exhausted, and if the claim exceeds the outside organization’s D&O limits, they are financially unable to further reimburse its board for that claim. Triple excess adds the third hurdle to clear, and that is that your organization is unable to reimburse you for your obligations in a claim.
Third, Outside Directorship Liability only extends protection to the leaders they ask to sit on a particular board. In the case of hedge funds, private equity, and venture capital firms which ask a leader to sit on an investee board, ODL does not provide entity coverage nor protection for the other directors.
Always important to remember is that D&O claims, even in the not-for-profit world will name directors individually for their actions which put your and your executive’s personal assets at risk. Ultimately this is why understanding these complexities is required.
Have other questions regarding Outside Directorship Liability, or D&O Insurance in general? Why not click the button below to schedule a time to chat with me. I promise, no hard core selling or other sales nonsense. Just some conversation to see if we might be a good fit for you and your firm. Thanks!