Optimizing D&O Policies for Private and Nonprofit Organizations

Optimizing D&O Policies for Private and Nonprofit Organizations
November 11, 2025 7 mins

Optimizing D&O Policies for Private and Nonprofit Organizations

Optimizing D&O Policies for Private and Nonprofit Organizations

When evaluating management liability insurance, it’s crucial to understand how your policy addresses legal defense costs. This overview highlights the key differences between Duty to Defend and Reimbursement approaches, helping you make an informed choice for your organization.

Key Takeaways
  1. The way your management liability policy handles legal defense, whether through Duty to Defend or Reimbursement, can significantly impact your legal costs, level of control, and overall claims experience.
  2. Duty to Defend policies place the insurer in charge of selecting and paying legal counsel, simplifying administration but limiting your choice. In contrast, Reimbursement policies allow you to choose your attorney (with insurer approval) but require you to pay costs upfront and manage reimbursement.
  3. Choosing between these options depends on your organization’s preference for control, willingness to manage administrative tasks, and comfort with potential upfront expenses. It’s essential to align your policy with your operational needs and risk tolerance.

When renewing or purchasing a management liability insurance policy, one of the most important and often overlooked considerations is how your legal defense will be managed if a claim arises. This overview will help you understand the difference between Duty to Defend and Reimbursement policies, and the typical claims experience for each.

Why It Matters

Legal defense is often the largest expense in management liability claims, with such claims including lawsuits from shareholders, employees, or regulators. The way your policy handles defense can impact:

  • Who selects and manages your legal counsel
  • How quickly your insurance limits are exhausted
  • How much control you have over the defense process and strategy
  • What costs you might incur out-of-pocket

Making an informed decision ensures that you are well-prepared to navigate stressful and complex situations.

What Is Duty to Defend?

With a Duty to Defend policy:

  • Assuming the policy is triggered, your insurer is obligated to provide and pay for your legal defense, even if the claim is groundless or false.
  • The insurer selects the law firm (typically from a list of experienced panel firms) and manages the defense process.
  • Legal bills are paid directly by the insurer at pre-negotiated, often discounted rates.
Example:

Your nonprofit is sued for alleged mismanagement. With a Duty to Defend policy, the insurer immediately appoints a specialized law firm and pays the bills directly,1 allowing you to focus on your organization rather than legal logistics.

What Is Reimbursement?

With a Reimbursement policy:

  • You choose your own legal counsel, subject to insurer approval of the attorney and their rates.
  • You pay for your legal defense upfront and then submit bills to the insurer for reimbursement, based on policy coverage.
  • You control the defense strategy, but settlements and other key decisions may still require insurer approval.
Example:

Your company is investigated by a regulator. Your policy extends to coverage for investigations, and you want to use your trusted outside counsel. With a Reimbursement policy, you can do so (with insurer approval) – you may pay their bills, and then seek reimbursement from your policy, keeping in mind that not all costs may be covered.

Comparing Your Options

Feature Duty to Defend Reimbursement
Who picks the attorney? Insurer (from their panel; you may request your own, with approval) You (with insurer’s approval of attorney and rates)
Who manages the case? Insurer You
Who pays the bills? Insurer pays attorneys directly at negotiated rates You pay upfront, then seek reimbursement (may not receive 100% back)
Cost allocation Insurer typically pays all defense costs for claims, even if there are uncovered claims Costs are split between covered and uncovered matters
Administrative work Minimal for you You manage invoices and the reimbursement process
Expertise Insurer’s panel firms are experienced in these claims You may choose attorneys familiar with your business
Rate caps Lower, pre-negotiated rates May be capped or negotiated; higher rates may not be fully reimbursed
Additional Considerations
  • Using Your Preferred Attorney: Some Duty to Defend policies may allow you to use your own attorney, provided the insurer agrees. Insurers will evaluate the qualifications of the firm and may endorse the firm at pre-negotiated defense rates – often lower than which the firm is charging you.
  • Switching to Duty to Defend: Some reimbursement policies allow you to transfer control back to the insurer for a specific claim.
  • Rising Legal Costs: Legal fees and court awards are increasing. The way your policy handles defense can help protect your insurance limits.

Real World Scenarios: Duty to Defend vs. Reimbursement

Real World Scenario Duty to Defend Reimbursement
Complex Lawsuit with Multiple Allegations The insurer covers all defense costs for covered claims, even if some parts of the lawsuit are not covered. You may need to track and split costs between covered and uncovered matters, which can be time-consuming and may leave you with unreimbursed expenses.
You Want to Use Your Own Trusted Attorney You may be required to use the insurer’s panel firm unless you receive special approval. You can choose your own attorney (with insurer approval), but you may incur higher out-of-pocket expenses if their rates exceed what the insurer allows.
Key Considerations
  • How much control does your organization want over legal strategy and attorney selection?
  • Does your organization have a relationship with an attorney who understands your business and these types of claims?
  • Is your organization prepared to handle the paperwork and cash flow involved in paying for legal defense upfront?
  • How important is it to ensure that all your legal bills will be paid (subject to policy limits)?
  • Are there reputational or operational issues that make control over the defense particularly important for your organization?

Conclusion

There is no single “right” answer, as each approach has its own benefits and trade-offs. The best choice depends on your organization’s needs, resources, and risk appetite. Understanding these options now will help ensure your insurance policy functions as expected if a claim arises.

If you would like to discuss which option is best for you or are interested in obtaining coverage, please contact your Aon broker.

Aon’s Thought Leader
  • Megan Black
    Assistant Vice President, Financial Services Group, United States

1 Note a deductible may apply.

General Disclaimer

Aon is not a law firm or accounting firm and does not provide legal, financial or tax advice. Any commentary provided is based solely on Aon’s experience as insurance practitioners. We recommend that you consult with your own legal, financial and/or insurance advisors on any commentary provided herein. All descriptions, summaries or highlights of coverage described herein are for general informational purposes only and do not amend, alter or modify the actual terms and conditions of any relevant policy. Coverage is governed only by the terms and conditions of such policy. Insurance coverage in any particular case will depend upon the type of policy in effect, the terms, conditions and exclusions in any such policy, and the facts of each unique situation. No representation is made that any specific insurance coverage would apply in the circumstances outlined herein. Please refer to the individual policy forms for specific coverage details. The information contained in this document and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity. This document is not intended to address any specific situation or to provide legal, regulatory, financial, or other advice. While care has been taken in the production of this document, Aon does not warrant, represent or guarantee the accuracy, adequacy, completeness or fitness for any purpose of the document or any part of it and can accept no liability for any loss incurred in any way by any person who may rely on it. Any recipient shall be responsible for the use to which it puts this document. This document has been compiled using information available to us up to its date of publication and is subject to any qualifications made in the document. Insurance products and services offered by Aon Risk Insurance Services West, Inc., Aon Risk Services Central, Inc., Aon Risk Services Northeast, Inc., Aon Risk Services Southwest, Inc., and Aon Risk Services, Inc. of Florida and their licensed affiliates.

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