Recently, during a presentation to a group of nonprofit board members, I learned that some in the audience were not aware of the risks they faced as board members. This article explains why purchasing Director and Officer Insurance is an essential element of every nonprofit organization’s risk management strategy.
Background – What responsibility does a Board of Directors have?
The United States federal and state laws place the responsibility of ensuring the purpose, plans and policies of nonprofit organizations on the board of directors. To govern properly, nonprofit boards must be sure that the organization’s mission (written in the articles of incorporation and filed with the state) is achieved and that the organization’s plans and policies are appropriate and being adhered to.
What is D&O Insurance?
Nonprofitrisk.org defines Director & Officer insurance as “insurance that provides coverage against wrongful acts which might include actual or alleged errors, omissions, misleading statements, and neglect or breach of duty on the part of the board of directors and other insured persons and entities. Many D&O policies include employment practices liability coverage.”
Director and Officer Insurance may cover the cost of legal counsel, out-of-court settlements, and court-ordered compensation payments. Without this insurance coverage, legal expenses to defend against a law suit could significantly damage your organization’s finances or even force your organization into bankruptcy.
Why is D&O Insurance needed?
All nonprofit organizations should maintain a current D&O insurance policy and no one should agree to serve on a nonprofit board unless they are sure that adequate insurance covers them for potential liabilities.
If an employee, a member of the organization, a volunteer, a donor or even someone from the general public thinks that the nonprofit hasn’t operated legally or according to its founding principles, they can sue the board of directors. Defending against these charges can require costly legal counsel, out-of-court settlement costs, or court-ordered damages may be incurred. (NOTE: Even if the charges are not valid, legal counsel may be required to defend the board members who are named in the law suit.)
Studies show that Human Resources-related concerns are the most frequent cause of law suits against nonprofit boards. This includes charges of illegal employment practices or negligence when hiring or firing employees, dealing with contractors, or managing volunteers. Other causes of law suits include conflicts of interest, not adhering to contracts, or using donations for other than their intended purpose.
Where can I get D&O Insurance?
Most insurance companies offer D&O insurance. Your state’s nonprofit support organization may advise you on insurance carriers that provide nonprofit D&O Insurance in your state.
Generally, the cost of a policy is based on the nature and size of the nonprofit and whether legal and/or settlement costs are covered. Additionally, some policies include a “lifetime extension” which provides coverage to board members even after they have left the board or the insurance policy has been cancelled.
Best Practices for D&O Insurance for your board
- The Treasurer of the board is usually responsible for finding an appropriate insurance policy for an organization. The Treasurer should review the D&O policy annually to be sure that the coverage continues to be sufficient for your evolving organization.
- Look into Employment Practices Liability Insurance while you’re looking at D&O Insurance. This insurance covers the nonprofit for Human Resources related grievances (sexual harassment, discrimination, etc) which are becoming more prevalent over time.
- The bylaws of the nonprofit organization generally state that board members are indemnified (protected from potential law suits) as long as they are attending meetings, paying attention to board decisions, and speaking up when they are in disagreement with decisions. Here is an example bylaw that pertains to D&O Insurance:
“Each director and officer shall be indemnified by the corporation for legal fees plus liabilities, fines, penalties and claims imposed upon or asserted against him or her (including amounts paid in settlement) unless he or she is judged liable because of gross negligence or willing misconduct in the performance of his or her duty as a director or officer.”
Include a discussion of your D&O Insurance coverage in your board’s annual orientation session that is attended by all board members. This discussion should include who is insured, the amount of the insurance coverage, the cost of the policy, and the warning that board members are not covered if they are not properly-engaged in the decision-making of the organization.
Don’t shy away from this issue.
Forward this article to your board’s Treasurer today and ask questions about your D&O Insurance coverage. Ask that a presentation about your coverage be made at the next board meeting. Make sure that you are insuring your organization against a liability that may surpass your organization’s asset value. If you are a board member, make sure that you are indemnified as a volunteer of your organization.