Directors and officers (D&O) liability insurance can provide an important source of protection, not only against potential liability, but also to defray the significant costs of investigating and defending these claims. The practical question is whether the institution’s existing policies will respond when the claim arrives.

By Gerry Leone, Geoffrey B. Fehling, Darren Sonderman and Sydney Sonderman

Financial distress is forcing many colleges and universities to make difficult decisions about liquidity, operations, programs, and more. Many of those choices risk consequences beyond the balance sheet in the form of claims alleging that boards and other leaders breached their fiduciary duties.

A recent Wall Street Journal report highlights just one recent example, describing increased use of restricted endowment funds by financially struggling institutions to meet operating needs. It also discusses allegations by the Ohio attorney general that trustees and officers of a now-closed college improperly used more than $2 million in restricted endowment assets outside donors’ intended purposes. Other institutions have sought court intervention to approve release of endowment restrictions or faced putative taxpayer class actions as a result of alleged budget deficits and lack of oversight.

These claims are a reminder that, when an institution faces financial pressure, decisions involving restricted gifts, operating budgets, loans, and debt management can risk substantial exposure for trustees, officers, senior administrators, and other personnel, especially those in a fiduciary relationship. Even where leaders act in good faith to preserve the institution and protect students, claims may follow from alleged failures to honor donor intent, maintain adequate controls, obtain necessary approvals, or properly oversee the institution’s finances. If leadership teams analyze risk management and insurance efficacy through the lens of adversity or a “worst-case scenario,” as opposed to an unimpeded, smooth-sailing process, insurance effectiveness can be materially improved.

Directors and officers (D&O) liability insurance can provide an important source of protection, not only against potential liability, but also to defray the significant costs of investigating and defending these claims. The practical question is whether the institution’s existing policies will respond when the claim arrives. And if insurance responds, how effective is the response? If insurance pays 25% of the loss, rather than 100% of the loss, the return on premium paid for such insurance is materially different. 

Here are a few things institutions should consider today to help ensure their D&O coverage is there when they need it most:

• Treat financial-distress decisions as potential D&O risks.

When an institution confronts declining enrollment, liquidity constraints, debt obligations, program reductions, layoffs, potential mergers, or closure planning, its trustees, officers, senior administrators, and other personnel may face allegations that they failed to exercise appropriate care, oversight, or judgment. Those allegations can arise even where leaders acted in good faith amid difficult circumstances. D&O insurance should be viewed as a core part of the institution’s risk-management response to these management and governance decisions.

• Watch out for “claims” (and understand what that means under insurance policies).

A common misconception is that notice is not required under an insurance policy until a claimant takes formal action, like filing a civil complaint. That is usually not true, as most claims-made policies require notice whenever anyone makes a written demand for relief of any kind, whether monetary or otherwise. Many times, the first signs of trouble include a donor email, regulator inquiry, or request for records. Institutions should understand their policies’ definition of a claim, know when and how notice must be provided, and ensure that coverage extends to prelitigation demands, investigations, and inquiries.

• Prioritize defense coverage.

While many higher-ed news articles focus on large verdicts or settlements, those headlines overlook one of the biggest advantages of securing robust liability insurance—access to top-notch legal representation and speedy reimbursement of legal costs required to defend claims. Policyholders should assess how and when defense costs are advanced before a final adjudication and be wary of limitations that can hamper those efforts. Some policies cede control of the defense to the insurer through panel counsel requirements, while others give the institution greater freedom to select counsel and direct the defense. Institutions should understand which approach applies and whether it aligns with their objectives.

• Protect individual leaders with dedicated “Side A” limits.

Financial distress can restrict an institution’s ability to indemnify its trustees and officers. It can also lead to a spike in claims against the institution that quickly exhausts shared insurance limits. Dedicated limits available only to individuals, often called “Side A” coverage, help preserve protection for trustees and officers when institutional indemnification is unavailable or shared limits have been exhausted.

• Examine exclusions before a claim arises.

Institutions should focus closely on exclusions that insurers may invoke in donor, governance, or financial-distress disputes, including exclusions for professional services, contractual liability, and insured-versus-insured claims. Exclusions tied to fraud, dishonesty, or personal profit should be narrowly drafted and triggered only by a final, non-appealable adjudication establishing the prohibited conduct.

• Coordinate D&O coverage with the institution’s broader insurance program.

Financial distress often gives rise to multiple types of claims at the same time. Allegations involving layoffs, misuse of funds, inadequate controls, cybersecurity incidents, or employee misconduct may implicate employment practices liability, crime, cyber, fiduciary, professional liability, or other policies in addition to D&O insurance. Institutions should work with their brokers, coverage counsel, and other risk professionals to identify potentially responsive policies early and ensure that coverage gaps do not emerge when multiple claims arise from the same underlying circumstances.

Conclusion

Financial pressure forces colleges and universities to make difficult decisions about endowments, budgets, borrowing, academic programs and institutional strategy. Even when those decisions are made thoughtfully and in good faith, they can draw scrutiny from donors, regulators, creditors, students, employees, and other stakeholders.

D&O and educator’s legal liability (ELL) insurance execution in the higher-education sector is more difficult and costly than many other industry sectors. The universe of viable insurers that are willing to offer broad and comprehensive insurance is narrower than in, say, the manufacturing, retail, services, or banking sectors. Structuring and placing “best-in-class” insurance, affirmatively and cleanly covering personal and organizational liability for higher ed leadership teams and organizations, is achievable but challenging.

D&O insurance cannot eliminate those risks, but a well-structured program can provide critical protection for the individuals charged with navigating them. The key is not simply purchasing coverage but ensuring the policy is designed to respond when needed. Numerous policy exclusions and coverage-limiting terms and conditions that are common in higher-education D&O/ELL policies can be eliminated, and affirmative coverage can be achieved. Institutions that review their coverage regularly, address problematic policy language, and coordinate D&O insurance with their broader risk-management strategy will be better positioned when claims arise.

The best time to evaluate D&O coverage is now, not after a donor, regulator, or other stakeholder challenges a decision that was made during a period of financial distress.

Gerard Leone (gleone@hunton.com) is co-head of Hunton Andrews Kurth’s higher education and private schools practice and special counsel in the firm’s complex commercial litigation group. Based in Boston, Leone has broad-based public, governmental, and private practice experience, including in niche special situations that require his distinctive skills, as well as in safety, security, and executive protection matters.

Geoffrey B. Fehling (gfehling@Hunton.com) is a Boston-based partner in the firm's insurance coverage group. He leads the firm’s D&O insurance and executive protection practice, working closely with corporate policyholders and their directors and officers to resolve high-stakes insurance disputes.

Darren Sonderman (darren.sonderman@cacgroup.com) is an Executive Vice President for the Financial Lines Practice with CAC Specialty in the broker’s Atlanta office. With nearly thirty years of underwriting and brokering experience, Darren covers traditional Executive Liability insurance as well as non-traditional risks including dual trigger insurance solutions, trading errors and omissions, all-risk professional liability, intellectual property, credit enhancement, credit default, technology efficacy, operational risk, antitrust, environmental, and transaction liability solutions. 

Sydney Sonderman (sydney.sonderman@cacgroup.com) is an Atlanta-based Associate Account Executive for the Financial Lines Practice at CAC, specializing in the placement and advisory of D&O Liability, Employment Practices Liability, Fiduciary Liability, Crime, and Professional Liability for companies operating in the commercial and financial institutions space. Sydney also has investment experience in U.S. equities and select cryptocurrencies.

Reprinted with permission from the September 24, 2026 edition of the Law.com © 2026 ALM Global Properties, LLC, trading as Centellic. All rights reserved. Further duplication without permission is prohibited, contact 877-256-2472 or asset-and-logo-licensing@alm.com.