There are more than 1.5 million nonprofit organizations registered in the United States, according to the National Center for Charitable Statistics (NCCS). Private foundations, public charities, chambers of commerce, civic leagues, fraternal organizations and other types of nonprofits face risks that put them in danger of experiencing significant losses.
Directors and officers (D&O) insurance is a type of liability policy payable to directors and officers of a nonprofit organization. If an employee, customer, vendor or third party files a lawsuit, D&O insurance can cover defense costs, settlements and other expenses that may arise as a result.
Business Benefits Group (BBG) offers a wide range of business insurance solutions for nonprofits, including directors and officers insurance. With a D&O policy from BBG, organizations can minimize their exposure to risks, and attract and retain qualified board members and executives.
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What Is D&O Insurance?
D&O liability insurance covers directors and officers for claims made against them while serving as an officer or on the board of directors. An organization’s directors and officers may be accused of wrongdoing while in the performance of management duties. Those who may file grievances include stakeholders such as customers, shareholders, suppliers, competitors, creditors or regulators.
Directors and officers insurance protects the personal assets of these individuals and their families if the organization is unable or unwilling to pay for their defense costs, judgments and/or settlements.
Some of the most common allegations that nonprofit directors and officers face include the following:
Breach of Fiduciary Duty
This type of allegation occurs when a claim is made that an executive or board of directors acted in their own self-interest instead of the interest of their organization. These complaints may be based on decisions made by a director or officer that was not in the best interest of the nonprofit but financially benefited the executive.
Unfair Trade Practices
A claim of unfair trade practices typically involve an allegation that the organization’s practices are fraudulent, deceitful or cause harm to customers. The claims are typically associated with the manner in which an organization obtains customers, such as through false advertising, deceptive trade practices, misrepresentation or unethical selling tactics.
Wrongful Interference with a Contract
Also known as tortious interference with a contract, this allegation arises when a business executive is accused of interfering with a contract that they were not a part of, resulting in a breach of contract. These claims are often associated with allegations that the nonprofit interfered with a party’s ability to perform their contractual obligation.
Violations of the Law
Directors and officers can face lawsuits when they are accused of violating a state and/or federal law that causes financial harm to their clients or shareholders. Lawsuits can occur whether or not the organization intentionally or unintentionally broke the law.
Consumer Protection Violations
The Federal Trade Commission regulates and enforces consumer protection rules that are designed to protect consumers from abuse and fraud caused by organizations. If a nonprofit is accused of such a violation, it may face a costly lawsuit that also causes reputational damage.
What Type of Business Needs D&O Insurance?
Claims against directors and officers do not only affect public companies. According to a Towers Watson survey, private, public and non-profit companies all face certain D&O litigation risks. If a nonprofit organization has an advisory committee or corporate board, it should consider investing in D&O insurance. It is important to remember that even small businesses with minimal assets need protection.
While directors and officers insurance can cover many liabilities, such as shareholder suits over stock performance, failure to comply with regulations, creditor or investor suits, pollution claims and cyber liability claims, there are certain things that are not covered by D&O insurance.
Common exclusions under D&O policies include personal profiting, fraud, bodily injury, property damage, accounting of profits, prior claim notice, ERISA, insured versus uninsured claims and pending and prior litigation.
Why Should Nonprofits Acquire D&O Insurance?
There are many reasons why nonprofit organizations should consider acquiring a directors and officers liability policy. D&O insurance can protect the personal assets of a nonprofit’s directors and officers; without proper coverage, these business leaders may be responsible for any financial losses incurred by the organization.
D&O insurance can also be an excellent recruitment and retention tool for nonprofits. Businesses will often have a harder time attracting qualified executives without offering protection against personal losses. Organizations can also enjoy financial protection as many lawsuits exceed the net worth of nonprofits, causing just one judgment to cause financial ruin.
Directors and officers’ insurance can also help nonprofits retain their reputation in the event of a lawsuit. Bad business decisions will often attract the attention of regulators, shareholders and other stakeholders which can put the organization’s reputation at risk.
Finally, a D&O liability policy can provide nonprofits and their business leaders with peace of mind. Directors and officers commonly work in demanding environments and face certain risks just by performing their normal job duties; D&O insurance enables these professionals to perform with confidence.
Trust BBG For Business Insurance Solutions
Directors and officers liability insurance offers essential coverage for nonprofit organizations of all sizes and in all industries. Nonprofit directors and officers owe certain duties to the organization in which they serve; they are responsible for providing the business with a duty of care, loyalty and obedience. When a breach occurs of any of these duties, it can result in costly litigation creating a substantial hardship for both the nonprofit entity and the individual director(s) or officer(s).
Business Benefits Group is an independent, full-service business insurance brokerage located in Fairfax, VA. BBG’s Business Insurance Division can be trusted to deliver sound insurance advice and policy recommendations that help ensure that nonprofits are equipped with the right policies and amount of coverage to address any situation that may develop.
To learn more about directors and officers insurance for nonprofit organizations or to request a consultation with a business insurance consultant, give Business Benefits Group a call at (844) 201-3612 or request a consultation online today.