Nonprofit directors and officers face significant personal liability if they fail to take appropriate steps to safeguard their personal assets, making D&O insurance an indispensable safeguard.
Liability policies vary significantly by insurer; here, we highlight some key issues.
Coverage
Nonprofit organizations must consider multiple forms of insurance to safeguard both themselves and those they employ, including health, auto, event and bonding policies to protect volunteers and stakeholders alike. One form often neglected is management liability insurance also known as directors and officers (D&O) coverage – it offers protection from potential lawsuits brought by peers alleging mismanagement to wrongful termination against board members in nonprofit settings.
Although its name suggests otherwise, D&O insurance covers more than just directors and officers of nonprofits; instead it can include anyone who holds any role within an insured nonprofit – whether that be directors, officers, trustees, employees or consultants as well as contractors hired to perform specific services by that nonprofit. It typically also protects against lawsuits brought by current and former employees as well as vendors/service providers/vendors/regulators/governmental litigators/state attorneys general/donors who use or benefit from its services as well as potential lawsuits filed by such parties against said organizations; D&O claims often result in legal fees/judgments which quickly deplete a nonprofit’s liquid assets and drain its liquid assets quickly unless covered by D&O coverage.
When purchasing a D&O policy, it is crucial to compare coverage limits and deductible options. Some policies offer flat rate for D&O coverage while others require payment of an upfront deductible before insurers will start covering claims. Furthermore, it is crucial to know whether the policy covers claims filed during its period only or all incidents at once – claims-made policies provide only coverage during specific dates, while occurrence policies offer coverage at any point during any year.
Nonprofits should take great care when considering D&O policies as the terms can have a dramatic effect on how much protection they provide. Consulting with an insurance agent will ensure that all risks are adequately covered while keeping deductible amounts within financial means of the nonprofit. Before committing to one policy or renewing another one, nonprofits must thoroughly discuss all add-ons or exclusions thoroughly with them as these could negatively affect its coverage and be sure all add-ons or exclusions are communicated fully before signing or agreeing upon committing.
Limits
Directors and officers (D&O), commonly referred to as management liability coverage, provides nonprofit leaders with protection against allegations of wrongful acts, errors or misleading statements made during the course of running the organization. D&O policies often feature limits of $10 million or higher that protect them against potential legal claims against individual board members that could otherwise threaten personal assets. Many brokers advise nonprofits purchasing such policies to safeguard them.
Bylaws for nonprofit organizations often include indemnifying board members who may be sued for acts committed in their capacity as directors and officers, but these promises often fall through without an effective litigation defense fund or D&O policy in place to fulfill them. A lawsuit or settlement could exhaust financial reserves quickly while also disrupting operations of the nonprofit.
A properly written D&O policy can cover many potential claims, from defamation and copyright or trademark infringement, to directors and officers personal injury coverage in cases involving bodily harm. Furthermore, such policies often offer coverage against publication of newsletters, marketing materials and media-related lawsuits such as libel or slander claims.
Some D&O policies are structured as “claims-made” policies and only pay out when a lawsuit is filed, while others act as “occurrence” policies by paying out when an incident allegedly took place. It’s essential to be familiar with both policies so as to select an adequate protection plan.
Size, operations and financial health are three primary considerations that impact the cost of D&O insurance for nonprofit organizations. In general, as your operations expand and risk increases for claims related to them. A nonprofit with poor financial health may see its premium increase due to higher claims risks.
Deductibles
D & O insurance provides directors and officers of nonprofit organizations with a safety net; however, it should not replace careful financial planning. Even small nonprofits with minimal assets face risks; one claim could prove disastrous to their reputation.
Nonprofit organizations must pay the cost of any judgments or settlements awarded as the result of claims filed against them, in addition to defending themselves against allegations of wrongful acts. Policy premiums can differ widely depending on coverage required, likelihood of claims occurring, and whether certain provisions increase risk.
Consider that D & O insurance provides protection to both individual board members as well as the organization itself, so all potential board members must understand its value before agreeing to join any nonprofit board.
Typically, D&O policies offer protection for claims arising from various activities:
Mismanagement of Duties: These claims typically allege failure or breach of duty when performing duties, such as negligence, fraud, making false or misleading statements and more. Mismanagement claims often form part of D&O claims for nonprofits and can have devastating financial repercussions for both leadership and the organization as a whole.
Employee-related claims: Nonprofits may face accusations of sexual harassment, discrimination, wrongful termination and negligent evaluation from employees and volunteers alike. Many D&O policies include employment practices liability coverage that can help defend the organization as well as board members from such accusations.
Additional Types of Claims: In addition to financial claims, nonprofit organizations may face other forms of liability, including property damage or business interruption claims. A D&O policy combined with general liability or business owner’s policies (BOPs) is often the most cost-effective solution in providing protection from multiple potential claims simultaneously at an affordable rate.
Exclusions
As previously noted, D&O policies don’t cover every claim; coverage details vary; the most frequent exclusions include any financial loss (direct or indirect), actions which contradict public policy or damage third-party property resulting from actions undertaken against said public policy and physical damage caused to third party properties resulting from actions undertaken to satisfy these exclusions typically aren’t included either; D&O usually isn’t an adequate replacement for general liability and workers compensation policies which cover bodily injuries to third parties as well as property damages respectively.
Nonprofit directors and officers owe fiduciary responsibilities to the organizations they lead, which puts them at risk of liability. Even groundless allegations can be costly to defend against; any defense costs could quickly drain away precious nonprofit resources.
So it is crucial that your nonprofit’s board members are protected with D&O insurance. This type of policy offers comprehensive protection to directors and officers as well as any heirs, executors, administrators or legal representatives of former directors or officers; furthermore most policies also provide employment practices liability coverage which protects against claims such as sexual harassment, discrimination, wrongful termination and negligent evaluations.
A D&O policy can also protect your nonprofit against the expenses related to litigation, such as attorney fees and any related costs. This can be particularly helpful for small organizations where just one claim could put them out of business and defend against false allegations can become exceedingly expensive.
As can be seen, D&O insurance policies are an invaluable investment for nonprofit organizations. While exact details vary between insurers, selecting one with maximum protection for your board of directors is key. An insurance broker can assist in helping to identify which policy offers optimal protection and compare and contrast various policies to help determine the most cost-effective and comprehensive option available to your nonprofit organization.
