D&O insurance for nonprofit boards: What it does and why it’s necessary
It’s widely understood that every organization — whether corporate or non-profit — needs liability coverage. But many mission-driven organizations overlook a type of liability insurance geared toward protecting not just their corporate body, but their leaders.
Directors and officers liability (D&O) insurance protects these individuals against personal losses “if they are sued as a result of serving as a director or an officer of a business or other type of organization. It can also cover the legal fees and other costs the organization may incur as a result of such a suit” (Investopedia).
So, why is D&O insurance particularly important to nonprofits? Many directors and officers for nonprofit organizations step into their roles with limited experience. Often, they lack the necessary knowledge of their legal duties and responsibilities regarding the nonprofit they serve.
Let’s take a look at D&O insurance, the particular factors that put nonprofit boards at risk and how technology (and in particular a board management solution) can help these organizations protect themselves.
Why nonprofit organizations need D&O insurance more than for-profit corporations
It’s common for nonprofit organizations to recruit board directors who have much passion for the cause, yet who don’t have experience serving as board directors.
For this reason, the general duties and responsibilities of running an organization are often less familiar to nonprofit board directors than to directors of for-profit corporations. The lack of direct experience and familiarity with business practices can mean that nonprofits operate less efficiently than their for-profit counterparts.
However, nonprofits are a business — and at times, a big business. Recent numbers indicate there are about 1.5 million nonprofits in the United States, with revenue totaling $2.4 trillion.
With the focus on the mission, nonprofits and their leaders don’t always give attention to liability issues. The lack of knowledge and experience about good governance and sound decision-making creates a greater risk of claims against nonprofit organizations than against for-profit corporations. These are valid reasons that all nonprofits should purchase D&O insurance protection.
As Griffith E. Harris Insurance Services point out, “D&O insurance for nonprofits is not just about managing risks; it’s about ensuring the organization can continue to make a positive impact without the fear of legal entanglements draining its resources.”
Counting the cost of not purchasing D&O insurance
When someone chooses to make an allegation against a director or officer of a nonprofit organization, or against the organization itself, they don’t typically consider the size of the organization or whether it can afford potential damages. Damages can be sizable, even for small nonprofits, and can easily exceed the net worth of many directors and officers. Settlements may include damages and legal fees.
According to Blue Avocado nonprofit magazine, the average claim against nonprofit directors and officers costs around $35,000 to settle. One of every 10 claims reaches $100,000 before the parties agree on a settlement.
What issues place directors and officers at risk of a D&O claim?
When directors and officers agree to serve on a nonprofit board, they agree to accept the multitude of duties and responsibilities that come with the position. Many of their duties place them at risk of allegations:
- They are responsible for setting the organization’s policies and procedures.
- They deal with any major complaints or claims against the nonprofit.
- They oversee all programs and services of the nonprofit, which makes them liable for all essential operations of the organization.
Nonprofit organizations may receive complaints or allegations as a result of how they handle public relations, fundraising, budgeting and setting human resources policies — and these complaints may involve the decision-making of the leadership team.
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Are directors and officers afforded immunity under the Volunteer Protection Act?
The Volunteer Protection Act is a federal law that protects volunteers against allegations of harm. It’s a law that provides limited immunity for volunteers who don’t receive compensation beyond reimbursement of other expenses.
The Volunteer Protection Act doesn’t necessarily cover directors and officers of nonprofit organizations from all actions and decisions in the course of their duties. It also doesn’t cover the cost of defense.
Nonprofit boards that fail to protect their organizations with a D&O insurance policy may find that the cost of just one claim is far larger than the cost of any insurance premiums they would have paid, if they had purchased a D&O insurance policy. Directors and officers insurance is the best tool for nonprofits to protect against unforeseen allegations of harm.
How does D&O insurance protect nonprofit directors and officers?
D&O insurance will not prevent claims from occurring; however, it does mitigate the high costs associated with defending claims. Lawsuits and potential claims may originate with vendors, donors, competitors, government regulators or employees. For example, 94 percent of the claims dollars under a D&O policy emanate from employment practices allegations.
D&O insurance policies are common and necessary to cover the actions and decisions of board directors and officers. D&O insurance policies offer coverage for defense costs, settlements, judgments arising from lawsuits and wrongful allegations brought against the nonprofit.
The cost of D&O insurance policies is determined by many factors, including the potential degree of risk and the size of the nonprofit. Boards may also reduce some of the costs of the policy by working with insurance companies to mitigate certain risks. Boards that have clearly written policies for hiring, firing and other issues will be viewed as less risky by insurance companies. Lower risk factors typically equate to lower insurance premiums.
Board directors should take care to understand their D&O insurance policies. Specifically, they need to be familiar with policy wording for directors and officers, as well as any additions, conditions and exclusions listed within the policy wording. Nonprofits may consider inviting an insurance professional to make a presentation to the board on D&O insurance as part of board development.
Regardless of the organization’s size and board experience, all nonprofit organizations need to purchase D&O insurance protection. In addition to a D&O insurance policy, all nonprofit boards should develop an effective risk management plan to protect individual directors, protect the organization and prevent claims against the D&O insurance policy.
How board development and technology support D&O protection
D&O insurance is a must for every nonprofit, but, like the safety measures you might implement at your home work hand-in-hand with homeowners’ insurance, your organization can take action to limit your risk.
Quickly onboarding new directors in their role and responsibilities should be a top-priority effort for nonprofits. Develop a standard library of training materials and opportunities for new members to learn about both the scope of board service and specific elements around fiduciary responsibilities, employment practices, conflicts of interest and other relevant guidance (for example, if the nonprofit handles public funds, open meetings laws may apply).
The strategic use of a modern board management solution like BoardEffect provides benefits as well. Consider how this tool can serve the organization:
- The searchable document library offers the perfect repository for materials related to board roles and responsibilities as well as onboarding resources. Directors and officers can access materials from any device.
- Secure workrooms allow committees and groups to conduct meetings on sensitive topics such as risk management.
- Customizable workflow management allows tracking of items for discussion and approval — particularly helpful for complex topics around liability coverage.
Directors and officers have a critical responsibility to guide their organizations, and one of those responsibilities is protecting themselves and their organization from risk. At Diligent, we understand these risks, which is why BoardEffect is designed with the functionality to support the board’s efforts to stay compliant in all areas of their work. Let us know how we can help you.
