60 WWW.AGRM.ORG MAY/JUNE 2017 DAY-TO-DAY I n your Directors & Officers liability insur- ance policy (also known as a D&O), you might notice a “retention limit” on the pol- icy declarations page. Do you know what that is? D&O liability insurance is an essential form of insurance that pro- vides both defense and settlement for the mission’s board of directors and officers (CEO, CFO, execu- tive director, etc.) if there has been an allegation of a “wrongful act.” There need not have been any actual bodily injury or property damage from an alleged act, but there must be an allegation of something that was done “wrong.” Since there is no standardized D&O insurance form that all insurers use, a great difference exists between good insurance policies and weak ones. Typically, a good policy will have provisions that allow not only the board to be protected but also the mission as an entity; that is, not only will each board member be protected individually, but so will the mission. An example of a claim that would likely need to be defended would be an allegation that an executive director should not have been hired by the board if he or she is accused of some malfea- sance, such as mishandling donations, a sexual abuse allegation, or some other negative behav- ior. All boards ought to carry D&O insurance for at least $1 million. Premiums typically start around $750 per year and are based on the size of assets plus the number of board members, staff, and volunteers. A retention limit is similar to, but somewhat different from, a deductible. In the case of a deductible, such as one in an auto insurance policy, if you were involved in a collision, the deductible would be deducted from the collision repair estimate. You would then receive a check for the difference, even if you opted not to have the repair completed. However, with a retention limit, your mission would need to pay this amount in order for the insurance company to defend your mission against an allegation of a wrongful act, even if the allega- tions are groundless. This could be a surprise to you and put an unexpected expense in your cash flow. Typically, under the same policy, there is both a retention limit for the D&O coverage and a separate limit for the employment practices coverage. Therefore, based on the nature of the alleged wrongdoing, the same lawsuit could double the retention expense to your mission. Before opting for higher limits, carefully consider the benefit of a retention limit in light of the insurance discount it may provide. Ĩ What Is a Retention Limit? Understanding this important term in your liability policy INSURANCE SOLUTIONS Brian H. Merriam Brian is the official insurance consultant for AGRM. The Merriam Agency offers property, casualty, auto, directors and officers, and workers’ compensation coverages tailored to the needs of AGRM members. You can email Brian at brian@merriaminsurance.com.