Why do nonprofits need Directors and Officers Insurance?
Every organization is susceptible to lawsuits, but good directors and officers insurance will protect you in the case of litigation for decisions you made for the organization.
Whenever anyone agrees to sit on the board of an association or organization, that person is assuming some responsibility for the organization. That person is then held responsible for managing the affairs of the organization in a proper manner. This might seem vague, but all board members are held to this standard. Therefore, board members expose themselves to be the target of claims.
D&O claims fall into the non-bodily injury category (this can include allegations of negligence, mismanagement, discrimination, etc.). For example, if a child is injured at a fundraiser, then the general liability insurance would cover damages filed by the injured child’s parents. If, however, the parents decide to sue your organization or any of its board members claiming that the board did not provide adequate safety measures, then the general liability insurance would not provide coverage for this accusation. Only D&O Insurance would provide the necessary coverage for this accusation.
A comprehensive D&O policy is essential for nonprofit organizations for several reasons. It’s a necessary tool in order to attract qualified individuals to sit on the board, as well as to act in the capacity of an officer or director. As a board member, you can be held personally liable for claims that arise out of the running of the organization. From the organization’s perspective, the consequences of not carrying this policy can be devastating. The average cost to defend an allegation can be in the tens of thousands of dollars. That is a cost most nonprofits can’t afford, nor do they have access to a specialized attorney to properly defend themselves. In the end, the organization may have to close its doors.
While many states have enacted charitable immunity for people serving as an officer, director, or trustee of a nonprofit, those laws can vary by state, as well as who might be entitled to protection under that statute. Whether or not a board member is compensated in that capacity can determine whether that person has protection under that statute. However, there is no liability protection under any state statute for violation of a federal statute. For example, if you violate the Americans with Disabilities Act or Civil Rights Act, there is no protection under state law.
It is relatively inexpensive to purchase a liability policy to protect not only the officers and directors, but also the entity itself when compared to the cost of hiring an attorney to defend an allegation (let alone a judgment) against the organization.
What Does D&O Insurance Cover?
D&O Insurance provides coverage for potential wrongful acts committed by the board members. Wrongful acts on a D&O policy include misleading statements, negligent acts, or breach of duties. The amount of coverage you ultimately purchase varies by each organization and its potential exposure. In the for-profit world, you have the risk of shareholders making a claim against the operations and running of the company. In nonprofits, you typically do not have claims from shareholders but may see claims from guardians of people that the organization serves, past officers and board members, as well as from employees.
D&O policy holders should know the status of their claims-made coverage. Claims-made coverage means the insurance company will pay for a covered claim if a lawsuit is filed and occurs while the organization holds the policy. By contrast, an occurrence policy will pay a covered claim based on when the accident or occurrence happened.
How can the fiduciary responsibility of board members lead to a claim?
The charters or bylaws of most nonprofit organizations require board members to protect the assets of the nonprofit, as well as to expand and grow the funding forces. An example might be if an officer or board member decided to use certain funds within an agency on a risky new program, and that risk proves to be a bad investment and the overall agency suffers financially. You could conceivably see a third-party claiming that the future of that organization could be in jeopardy because its endowment or funding has been diminished significantly by the choices of that officer or board member.
How can you avoid gaps in coverage that could lead to uncovered claims?
With D&O policies, the devil is in the details. A comprehensive review of the policy language is essential to understanding what you do and do not have coverage for. Does the policy contain an Insured versus Insured exclusion? Is the policy providing coverage for employment practices liability as well? Is the limit of insurance a shared limit, or does each agreement have a separate limit of liability? Is the cost of defense included within the limit of liability? What is the retention amount? Using a broker that specializes in the nonprofit sector can be a great source of information as to the difference between policies.
When completing the application it is important that you fully disclose accurate information, as misstatements can void coverage. The application becomes part of the policy and is a warranty statement. Organizations should also emphasize any loss control and risk management policies used to help minimize any potential losses. By giving more information to an underwriter, you will be able to negotiate better pricing and broader coverage.
All nonprofit organizations need to include D&O Insurance into their structure. It is an absolute necessity nowadays as more and more people are turning to litigation. It’s expensive just to defend a baseless claim. Protect yourself and your organization by obtaining a D&O policy that will protect your leaders.