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.
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.
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