When most people think about Directors and Officers insurance (D&O insurance), they think it’s only needed by large publicly traded for-profit businesses with many shareholders. But adequate D&O protection is just as essential for not-for-profit organizations to guard against actual or alleged wrongful acts.
Why Do I Need Non-Profit Directors & Officers Insurance?
Speaking with non-profit clients, the common misconception is that their directors, officers, and trustees do not have any real personal liability exposure from their non-profit activities. Many join the non-profit sector to serve the community so it never crosses their mind that they could be exposing themselves to serious financial harm as a result.
But the reality is that the legal standards of conduct required of non-profit directors and officers are at least as high as their counterparts working in for-profit corporations – if not higher. And in today’s litigious environment, the financial risk to non-profit leaders is greater than ever. You may find that the cost of even one small claim can exceed the annual cost of directors and officers insurance by tenfold.
Many non-profit board members are recruited for their passion towards the cause rather than their actual board experience. Many of these positions are also part time and uncompensated. As a result, mistakes can happen due to inexperience or a lack of familiarity with the appropriate business practices. With less external scrutiny, there is also more room for complacency and accidental misconduct.
While everyone wants to do good for their community and the world, nobody wants to lose their home in the process. Non-profit boards need to understand their fiduciary duties and carry adequate Not For Profit Directors and Officers Insurance to protect against that very real possibility.
Fiduciary Duty of Non-profit Boards
Like for-profit businesses, non-profit boards are responsible for maintaining the financial stability of the organization and ensuring that its goals are met. This means handing a wide range of executive duties such as:
- Public Relations
- Overseeing Program/Service Delivery
- Human Resource Management
By its very nature, nonprofits work on a shoestring administrative budget to ensure that most of the money can go towards achieving the organization’s mission. This means many boards have insufficient resources, time, and information needed to make the best decisions possible leaving them exposed to litigation.
Common Directors and Officers Insurance Claims Examples
Most claims brought against non-profits are related to actual or alleged misconduct surrounding the handling of finances, delivery of services, or general day-to-day administrative tasks.
Some of the common claims include:
- Wrongful Termination
- Misuse or Waste of Assets
- Misleading Reports or Misrepresentations
Out of all the D&O claims filed globally, over a third were related to employment practices. Most claims did not accuse board members or senior leaders of any actual wrongdoing, rather they alleged that leaders did not enforce the rules of conduct meant to prevent the alleged act.
Lawsuits can be brought by any number of stakeholders including donors, employees, and recipients of your services. Even if these claims are ultimately without merit, the cost of defending a lawsuit can easily lead to devastating personal financial consequences for board members.
“While everyone wants to do good for their community and the world, nobody wants to lose their home or life savings in the process.”
What Does Directors & Officers Insurance Cover?
D&O insurance does not prevent a claim from occurring – only good governance can do that. Non-profit Directors and Officers Liability Insurance covers the cost of claims of actual or alleged wrongful acts committed by senior leaders and board members. It does not cover any intentional acts such as fraud, acting for personal profit, or receiving illegal compensation.
When a valid claim arises, the insurance company will reimburse the organization and/or the directors and officers involved in the claim for defense costs, settlements and any damages awarded to the plaintiff.
With legal fees easily reaching into the 6-figures, this type coverage is worth your insurance broker’s weight in gold.
How Much Does Directors & Officers Insurance Cost?
The costs vary based on the type and size of the non-profit that you run as all of this impacts your risk from the insurer’s perspective. That said, boards can reduce some of the cost of D&O insurance with certain risk management procedures such as having written policies for hiring, firing, and other key risk factors.
The lower your risk, the cheaper your D&O premium will be.
Who Needs Non-profit D&O Insurance?
All nonprofits from professional associations, to sports clubs, to charitable or social services organizations need to consider how they can mitigate their risks.
Regardless of your organization’s size or board experience, all nonprofits need to carry D&O insurance to mitigate the financial impacts of a claim and a comprehensive risk management plan to prevent claims from arising in the first place.