D&O and Board Liability

Why Board Seats Carry Personal Risk

A board director is not a passive observer. Directors owe legal duties — most commonly a duty of care (acting with reasonable diligence) and a duty of loyalty (putting the organization's interests ahead of personal ones) — to the entity they serve and, depending on the type of organization, to shareholders, regulators, or the public. When those duties are alleged to have been breached, directors can be named personally in lawsuits, regulatory investigations, or government enforcement actions.

For families with substantial wealth, board service is common. A founder may retain a board seat after selling her company. A family member may join the board of a privately held portfolio company, a private foundation, or the family office itself. Each of those seats is a distinct source of personal liability, and each deserves its own analysis before the seat is accepted.

Indemnification: The First Layer of Protection

Indemnification is a promise by an organization to reimburse a director for legal costs, judgments, and settlements arising from their board service. Most corporations and larger nonprofits provide indemnification through their bylaws or a separate indemnification agreement. In many jurisdictions, organizations are permitted — and sometimes required — to indemnify directors who acted in good faith.

The critical limitation is counterparty risk. Indemnification is only as strong as the organization making the promise. If a company becomes insolvent precisely because of the events that triggered the lawsuit, the indemnification agreement may be worth very little. This is the scenario D&O insurance is specifically designed to address — and it is why insurance and indemnification are treated as complementary, not interchangeable, forms of protection.

Directors should ask to review the specific indemnification agreement — not just the bylaws — and understand whether it covers legal fees as they are incurred (an "advancement" provision) or only after a final resolution. A qualified attorney should review any such agreement before a seat is accepted.

D&O Insurance: The Three Sides

Directors and officers insurance is typically structured in three coverage components, referred to in the industry as Side A, Side B, and Side C. Understanding what each covers helps directors and their advisers evaluate whether a policy genuinely protects them.

Side A: Direct Protection for the Individual

Side A coverage pays the director or officer directly when the organization cannot or will not indemnify them. This is often the most important layer for individual directors, because it responds precisely when indemnification has failed — for example, in a bankruptcy, or when a court determines that indemnification is not permitted for certain conduct. Some directors and family offices purchase standalone Side A policies as an additional layer of personal protection, independent of the company's broader D&O program.

Side B: Reimbursing the Organization

Side B coverage reimburses the organization itself after it has indemnified a director. The company pays the director's defense costs and losses, and then the insurer reimburses the company. This protects the organization's balance sheet from large, unexpected indemnification payments.

Side C: Entity Coverage

Side C coverage — sometimes called "entity coverage" — protects the organization itself when it is named as a defendant alongside its directors and officers, most commonly in securities claims against public companies. For directors serving on private company or nonprofit boards, Side C is less central, but it still affects how the overall policy limit is shared between the entity and the individuals.

A useful mental model: Side A protects the person, Side B protects the company's promise to protect the person, and Side C protects the company itself. When a single policy limit covers all three, individual directors should understand that entity claims could exhaust the limit before personal claims are fully paid.

Nonprofit and Foundation Board Exposure

Board service at a nonprofit — including a private foundation — carries its own distinct risks. Foundation board members (often called trustees or directors) are subject to governance and compliance requirements enforced by the IRS and state attorneys general. Violations of rules prohibiting self-dealing, excessive compensation, or improper grants can result in excise taxes levied personally against foundation managers who approved the transaction.

Many smaller nonprofits and family foundations carry modest D&O coverage — or none at all — and their directors may assume they are protected without verifying. A family member serving on a foundation board should confirm that adequate coverage exists and review the policy's exclusions, particularly around self-dealing allegations, which are sometimes excluded or sublimited.

For families managing philanthropic activities with significant assets, this topic overlaps directly with family office governance structures, since the same individuals often serve in multiple fiduciary capacities simultaneously.

Private Company and Family Office Boards

Private companies — portfolio companies, operating businesses, and joint ventures — may carry D&O coverage, but the quality and limits vary widely. Directors joining a private board as part of a co-investment or direct investment arrangement should ask specifically about the D&O program before agreeing to serve. This is especially relevant for family members or family office staff who may be asked to take observer or full director seats as a condition of an investment.

Family offices that operate as formal legal entities with their own governance boards create another layer of potential exposure for the individuals serving on those boards. As noted in coverage of family office governance, the fiduciary duties owed within the family office structure deserve explicit attention — and the D&O coverage protecting those roles should be reviewed with the same rigor applied to any external board seat.

Diligence Before Joining Any Board

Accepting a board seat without reviewing the organization's liability protection is a common and avoidable mistake. Before joining, families and their advisers may consider evaluating several areas:

• Does a D&O policy exist? Obtain a copy of the declarations page and any relevant policy documents, not just assurances that coverage is in place.
• What are the limits, and how are they shared? A low aggregate limit shared among all three sides can leave individual directors exposed when entity claims arise.
• What are the exclusions? Common exclusions include fraud, intentional misconduct, claims between insured persons, and — in some policies — regulatory investigations. Each exclusion deserves scrutiny.
• Is there an advancement provision? Legal defense costs often arise before any claim is resolved. Knowing whether the policy or indemnification agreement covers costs as they accrue matters enormously in practice.
• How is the coverage coordinated with personal umbrella coverage? D&O policies and umbrella and excess liability policies can interact in ways that are not always obvious. A qualified insurance adviser should map the coverage layers.
• What is the organization's financial health? An indemnification agreement backed by a financially distressed entity provides limited real-world protection.

A qualified attorney should review any indemnification agreement, and a licensed insurance professional should assess the adequacy of the D&O program, before a board commitment is made.

Common Mistakes and Questions to Ask

Directors sometimes assume that good intentions — or the fact that they serve without compensation — insulates them from liability. In most jurisdictions, unpaid volunteer directors are still subject to the same legal duties as compensated ones, though some states have limited volunteer liability statutes for nonprofit service. The scope of those protections varies and should not be assumed without legal review.

Another frequent oversight is failing to update personal coverage after joining a new board. A family member who adds two or three board seats over a period of years may find that their personal coverage landscape has changed materially. Periodic review of all board service — and the coverage associated with each seat — is a discipline worth building into regular advisory conversations, particularly as addressed in resources on building an advisory team.

Questions worth asking before any board commitment include: Who has been sued on this board before, and for what? What litigation or regulatory matters are currently pending? Who decides whether to advance legal fees, and how quickly? Can I be removed from the policy mid-term without notice?