Nonprofit organizations and private companies that rely on federal funding are potentially facing increased risk arising from cuts across a range of government programs. Risks include directors and officers liability exposures arising from risks ranging from operational performance concerns to challenges associated with adapting to fast-changing regulatory and funding conditions.
On the first day of the second Trump administration, the president issued Executive Order 14222 establishing the Department of Government Efficiency (DOGE). Within a short time, DOGE began cutting or defunding programs across agencies, impacting contracts and grants for social services, environmental protection, the arts, housing, among other areas. The actions have the potential to create financial gaps for private and nonprofit organizations already operating on thin margins. Directors and officers faced with making systemic organizational decisions under these conditions may find themselves doing so with little or no advanced notice of government action.
The corporate governance and liability implications for DOGE-implemented changes are potentially wide-ranging. For organizations and their directors and officers, risks may fall into several categories, including:
D&O policies are, by design, written expansively to cover “Loss” arising from “Claims” against “Insureds,” including directors and officers. Claims must allege “Wrongful Acts,” which are customarily defined to include any acts, errors, statements and other forms of conduct in the director’s or officer’s official capacity. As to alleged conduct in their official roles including, for example, breach of fiduciary duty and mismanagement allegations, individuals are generally covered – subject, as always, to policy limitations and exclusions, including the exclusion for finally adjudicated deliberate misconduct.
Private companies and nonprofit entities maintain broad entity coverage. Policies, however, typically have some form of contractual liability exclusion. Additional limitations may include exclusions for professional services (E&O) and employment practices violations, as well as provisions within the definition of “Loss” that preclude coverage for many civil fines and penalties.
D&O policies often include coverage for individual insureds who are targeted in government investigations, but it is not customary for policies to cover investigations into the entity itself. If coverage for this exposure is afforded, it is most commonly subject to smaller sublimits of liability. In contrast, regulatory enforcement proceedings are generally considered to be “Claims” and so capable of triggering coverage.
To the extent solvency becomes a concern for organizations who have lost significant funding, D&O policies are designed to be responsive to most claims involving distressed risk, including claims brought by creditors, trustees, and stakeholders. Bankruptcy-focused D&O coverage specialization is essential in times of uncertainty. Companies with any inkling of upcoming issues should reach out sooner than later (but it’s never too late) to specialized D&O brokerage distressed risk teams.
Finally, some D&O policies include coverage for costs incurred to address reputational risk (and potentially mitigate litigation risk), such as organizational and personal crisis exposures. The coverage, which is customarily sublimited, can pick up legal and public relations expenses incurred to manage and mitigate the reputational impact of a crisis.
While insurance markets have not taken a blanket approach on the subject of government funding in the renewal process, organizations can expect increased scrutiny, especially within the education, healthcare and nonprofit spaces. For those impacted by DOGE cuts, organizations should be prepared to discuss how much funding was received prior to the change of administration and what percentage this represents compared to overall budgets. Organizations should also be able to articulate any changes made to their business model due to funding restrictions, as well as future adjustments that may also be necessary. While these reductions have had a devastating impact on many, the ability to show careful planning and resiliency could make a meaningful impact when renewing D&O programs.
Should there be material changes in renewal terms, the scope would likely depend on the severity of the funding impact on operations, particularly companies that may be considered insolvency risks. Many organizations, however, may experience few or no changes in terms. Effective broker advocacy in the renewal process is essential.
Proactive and informed governance is a key to risk mitigation and potentially to the defense of D&O claims. Directors, officers, risk managers and their advisors should consider the following measures as part of an effective risk mitigation strategy:
WTW hopes you found the general information provided here informative and helpful. The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal advisors. In the event you would like more information regarding your insurance coverage, please do not hesitate to reach out to us. In North America, WTW offers insurance products through licensed entities, including Willis Towers Watson Northeast, Inc. (in the United States) and Willis Canada Inc. (in Canada).
