Does a nonprofit organization really need directors and officers (D&O) liability insurance? In the majority of cases, the answer is yes. Directors and officers insurance is a common type of coverage used to protect the personal assets of directors and officers, as well as their spouses, should they ever be sued by customers, vendors, employees, investors, competitors or other parties. Although all businesses will benefit from having a D&O insurance policy, nonprofits are especially benefited from this type of coverage.
What Is Directors & Officers Insurance
When serving on a board of directors or as an officer, legal claims may arise that result in costly legal expenses and settlements. Directors and officers liability insurance is a policy that covers directors and officers of nonprofit organizations, as well as for-profit businesses, educational institutions and privately held firms.
D&O insurance claims are typically paid directly to directors and officers for any losses or reimbursement of defense costs if legal action has been brought against them. D&O coverage can also extend to regulatory and criminal investigations, as well as trial defense costs. Although D&O policies may be written to protect against a wide range of hazards, they generally exclude criminal activity, fraud and illegal profits.
Nonprofit organizations usually purchase directors and officers insurance to cover a group of individuals rather than the individuals obtaining insurance for themselves. Depending on the nature of the organization, D&O policies can take on many different forms. For this reason, it is important to speak with a business insurance broker to see what type of policy is best suited for the organization and how much coverage is needed to maintain protection.
How Is It Different for Nonprofits?
Nonprofit organizations may discover that they require D&O insurance even more than traditional for-profit companies. According to a survey published by the Insurance Information Institute, 31 percent of companies reported that they had a D&O claim made against them in the previous five years. Of these companies, 58 percent were nonprofit organizations.
The reason that nonprofit organizations are more likely to face D&O claims is due to the individuals hired to manage the organization. It is not uncommon for nonprofit organizations to hire board directors and officers who may be passionate about their job duties but lack sufficient business experience. Operating a nonprofit organization requires extensive business experience; passion for the goals of the organization may not translate into corporate acumen.
A lack of knowledge may result in claims made against the nonprofit; these may include accusations of mismanaged funds, failure to perform official duties or failure to meet regulatory standards. When a lawsuit related to decisions made by a director or officer is filed, D&O insurance will help cover any legal fees or settlements resulting from the claim.
What Does D&O Insurance Provide for Nonprofits?
Directors and officers insurance assists with the coverage of defense costs, judgments and settlements resulting from lawsuits and wrongful act allegations. Nonprofit organizations do not always realize that their board members could be held personally liable for their actions within the organizations. D&O insurance is one of the best ways for organizations to protect their board members and their personal assets from catastrophic losses.
While D&O insurance cannot prevent claims from occurring, it can help minimize the costs associated with such claims. The cost of a D&O insurance policy is based on a wide range of factors, such as the size of the nonprofit and the degree of risk that the organization faces. Industries are categorized as low or high risk. A board with clear and regulated policies for hiring and other business aspects will typically be viewed by insurance companies as a lower risk.
In addition to protecting boards from lawsuits, D&O insurance can also help nonprofit organizations attract new talent. When job candidates know that the directors and officers within a certain organization are protected against personal losses, they will be more likely to accept that position, compared to offers with organizations where their assets may be at risk.
The Importance of D&O Insurance for Nonprofits
Many nonprofit organizations underestimate the importance of directors and officers insurance until it is too late. Any allegations of breach of duty, mismanagement or neglect could be directed at the board of directors or officers of the organization. In many cases, allegations turn into expensive lawsuits which may also have a negative impact on the organization and its members.
There is a common misconception that personal insurances, such as homeowners insurance, will cover an individual’s actions on behalf of the board. This is not true, as homeowners insurance is designed solely to protect residential property and general liability. When a nonprofit organization fails to acquire a D&O insurance policy, any claims faced by a board member or officer could result in the loss of personal assets.
Of course, D&O insurance should never be the only type of insurance acquired by a nonprofit organization. Nonprofits also benefit from having other policies for more comprehensive protection. Some of the most important policies for nonprofit organizations include general liability insurance, professional liability insurance, business owner’s policy, commercial auto insurance, cyber liability insurance, workers’ compensation insurance and employment practices liability insurance.
Speak with a Business Insurance Broker Today
Becoming a director or officer on a board of a nonprofit organization comes with countless duties and responsibilities. Even when these professionals believe that they are performing their duties to the best of their abilities, complaints and allegations can still develop, putting the organization at risk.
Ideally, nonprofit organizations should acquire D&O insurance as a starting point and then consider add-on coverages to enhance protection. A directors and officers insurance policy should be used in conjunction with an effective risk management plan to protect individual directors and officers, as well as the organization as a whole. To learn more about directors and officers insurance for nonprofits, contact the experts at Business Benefits Group.