Regardless of the size of your nonprofit, there’s always a chance it could be targeted with litigation that arises from the decisions made by the board of directors.
For that reason, it’s important that you have the right D&O insurance policy in place to protect your board members and your organization from costly fees associated with potential lawsuits.
What is D&O Insurance?
Unlike a commercial general liability policy (GL) that provides coverage for claims arising from property damage and bodily injury, a directors’ and officers’ liability policy, also referred to as D&O insurance, specifically provides coverage for a “wrongful act,” such as an actual or alleged error, omission, misleading statement, neglect or breach of duty.
Nonprofit organizations provide essential social services that benefit the community and their members. These organizations cannot survive without a board of directors to make major decisions on behalf of the organization.
However, even when acting in good faith, directors and officers of nonprofits expose themselves to risks with each decision they make on behalf of their organization.
In the event of a claim, leaders of a non-profit organization like yours could suffer severe damage to their reputation and personal finances simply based on their decisions.
Top 5 Benefits of D&O Insurance:
In order to protect themselves, D&O insurance for nonprofit leaders is crucial and can provide the following benefits:
Legal Cost Reimbursement. In the event of a claim, D&O policies can provide defense cost coverage for a variety of claims. Specifically, D&O insurance can provide legal cost reimbursement to nonprofit leaders following allegations of wrongful acts, financial mismanagement, errors in judgment and negligence. Because D&O lawsuits can occur without warning and easily reach six figures, it’s critical that nonprofit leaders arm themselves with the right policy.
Peace of Mind. D&O claims can come from a variety of sources, including employees, recipients of services, government bodies and donors. D&O insurance ensures that nonprofit leaders are protected regardless of where claims originate, providing timely and effective coverage.
Entity Coverage. A number of D&O policies go beyond protecting directors and officers and extend to the organization itself. This is particularly advantageous, as this type of coverage kicks in even if a director or officer isn’t directly involved in a claim.
Flexible Limits. Most insurance companies offer a variety of coverage limits for D&O policies. In some cases, these limits can go as high as $10 million, depending on the size of the nonprofit.
Protection Beyond Indemnification. While the bylaws of many nonprofits require the company to indemnify and defend directors and officers who are sued, leaders shouldn’t expect this protection to be sufficient. That’s because a nonprofit’s duty to indemnify is only a good as its ability to pay. This means that, if the nonprofit is insolvent or not financially stable enough to cover the legal fees, directors and officers would have to cover these fees themselves.
D&O Insurance + Endorsements
Some D&O insurance policies can be endorsed to provide employment practices liability (EPL) coverage and /or fiduciary liability protection.
EPL Endorsement – broadens coverage, but often does not provide a duty to defend clause and are subject to a substantial deductible
Fiduciary Liability Endorsement – provides coverage for liabilities arising out of ERISA, where fiduciaries can be held personally liable for losses to a benefit plan incurred as a result of alleged errors, omissions or breach of their fiduciary duties.
Interested in Learning More About D&O Insurance?
Though you may not realize it, board members can be held liable for the actions of the nonprofit organizations they serve. In order for a nonprofit to protect its company mission and its board member’s personal assets, D&O insurance is a critical component of your risk management program.
This article was adapted from Zywave’s Benefits of D&O Insurance for Nonprofits and Directors’ and Officers’ Liability Insurance Flyer. This is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice.