Although directors and officers liability insurance is sometimes perceived to only be necessary for leaders of large public corporations, all organizations can benefit from it — even nonprofits.
“Statistically, more than a third of all companies can expect a claim against an officer or director,” says Shane Moran, vice president of ECBM Insurance Brokers and Consultants. “The risk is pretty high that you’re going to see a claim.”
Smart Business spoke with Moran about how directors and officers liability insurance can protect the board members of nonprofit organizations.
Why do nonprofit organizations need to invest in D&O insurance?
A comprehensive D&O policy is essential for nonprofit organizations for several reasons. It’s a necessary tool in order to attract qualified individuals to sit on the board, as well as to act in the capacity of an officer or director. As a board member, you can be held personally liable for claims that arise out of the running of the organization.
While many states have enacted charitable immunity for people serving as an officer, director, or trustee of a nonprofit, those laws can vary by state, as well as who might be entitled to protection under that statute. Whether or not a board member is compensated in that capacity can determine whether that person has protection under that statute. However, there is no liability protection under any state statute for violation of a federal statute. For example, if you violate the Americans with Disabilities Act or Civil Rights Act, there is no protection under state law.
Another reason is cost. It is relatively inexpensive to purchase a liability policy to protect not only the officers and directors, but also the entity itself when compared to the cost of hiring an attorney to defend an allegation, let alone a judgment against the organization. Most nonprofits don’t have in-house counsel with the expertise to address these claims.
What does D&O insurance cover?
The basic D&O policy form is meant to cover directors, officers and board members for wrongful acts while they are acting in that capacity. The amount of coverage you ultimately purchase varies by each entity and its potential exposure. In the for-profit world, you have the risk of shareholders making a claim against the operations and running of the company. In nonprofits, you typically do not have claims from shareholders but may see claims from guardians of people that the organization serves, past officers and board members, as well as from its employees.
The nonprofit D&O policy has evolved to include claims against the officers as well as claims for employment practices liability. Another area of coverage that may be included is fiduciary liability. Most of the D&O claims that we see stem from wrongful termination, discrimination and sexual harassment.
