When the lawsuit names you personally.

Side A, Side B, Side C: who gets paid

A D&O policy is usually built from three parts, each answering who is out of pocket.

• Side A is designed to pay directors and officers directly for acts the organization is not legally required to indemnify, or when it cannot or will not indemnify them, for example because the law bars it or the company is insolvent.
• Side B is corporate reimbursement. When the company indemnifies its people, an obligation usually written into the charter or bylaws and sometimes mandated by state statute, Side B is designed to pay the company back.
• Side C is entity coverage for claims made against the organization itself. For a publicly traded company it is entity securities coverage: claims tied to securities the company issued, often after a corporate action drops the stock price.

IRMI, the industry reference, notes that a standard corporate D&O form does not respond when the organization itself is the named defendant. A number of corporate forms now offer entity coverage by endorsement. Nonprofit D&O forms are described as generally broader, with entity coverage, employment practices coverage and substantially lower retentions.

When I compare quotes, I read each side's wording; Side A matters most if the company cannot pay. If you run a nonprofit, the rest of your program is on nonprofit insurance.

Volunteer nonprofit directors: the insurance condition

California shields unpaid nonprofit directors and officers from many negligence claims, but both statutes tie that protection to insurance.

Corporations Code 5047.5

No claim for money damages arises against a director or officer serving without compensation for a negligent act within board or official duties, in good faith, believed to be in the corporation's best interest, and in the exercise of policymaking judgment. It applies only to 501(c)(3) or 501(c)(6) nonprofits, and only if the corporation maintains a liability policy of at least:

• $500,000 when the annual budget is less than $50,000
• $1,000,000 when the annual budget equals or exceeds $50,000

The claim must also be one that can be made directly against the corporation, with a liability policy applicable to it. Exceptions include self-dealing, conflicts of interest, Attorney General actions, gross negligence, fraud, and intentional or reckless acts. It does not apply to a director the corporation pays in any other capacity, such as an employee.

Corporations Code 5239

For public benefit corporations, a volunteer director or executive officer is not personally liable to a third party for negligence within their duties, in good faith and not reckless, wanton, intentional or grossly negligent, if the damages are covered by a general liability or D&O policy issued to the corporation or to the person. If not covered, the protection still applies when the board and the person made all reasonable good-faith efforts to obtain available insurance. Under 5239(h), a 501(c)(3) with an annual budget under $25,000 meets that test with at least one inquiry a year for a general liability policy of at least $500,000, if it was not available for less than 5 percent of the previous year's budget. Per diem, mileage and expense reimbursement do not make someone paid. Section 5233, 5237 and Attorney General actions are excluded, and the corporation itself stays liable.

Official sources

• California Corporations Code 317 (indemnification of agents)
• California Corporations Code 5238 (public benefit corporation indemnification)
• California Corporations Code 7237 (mutual benefit corporation indemnification)
• California Corporations Code 5047.5 (volunteer directors and officers)
• California Corporations Code 5239 (volunteer directors, public benefit corporations)
• IRMI: directors and officers (D&O) liability insurance
• IRMI: entity coverage
• IRMI: insured versus insured exclusion
• IRMI: prior and pending litigation exclusion
• IRMI: pre-set allocation provision