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The Importance Of D&O Insurance For Nonprofit Boards

The Importance of D&O Insurance for Nonprofit Boards

It’s a misnomer to believe that only large nonprofit organizations need D&O insurance. Directors and officers of every-sized nonprofit organization have meaningful exposure to personal liability. About 20% of all U.S. corporations are nonprofits. The liability for directors and officers of small corporations is at least as high as that of for-profit corporations.

Large numbers of directors and officers for nonprofit organizations lack experience. Often times, they also lack sufficient knowledge of their legal duties and responsibilities regarding the nonprofit they serve. Directors and officers of nonprofit organizations who do have knowledge or experience sometimes take advantage of the less formal approach of nonprofits and fail to take the same business approaches to decision-making as they would when working for a for-profit corporation.

It’s critical for nonprofit board directors and officers of all types and sizes of nonprofit organizations to understand that not all of their actions are covered by the federal Volunteer Protection Act. 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.

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 any experience serving as board directors. For this reason, the general duties and responsibilities of running an organization are less familiar to nonprofit board directors than to directors of for-profit corporations. The lack of direct experience and familiarity with business practices often means that nonprofits operate less efficiently than their for-profit counterparts.

According to a survey by the Insurance Information Institute, of the 31% of companies that had a D&O claim against them within the previous five years, the majority, which accounted for about 58%, were nonprofit organizations.

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.

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 sizeable, 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.

The litigiousness of our environment makes it necessary for nonprofit organizations of all sizes to secure D&O insurance.

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. Directors and officers are responsible for setting the organization’s policies and procedures. Board directors also deal with any major complaints or claims against the nonprofit.

Nonprofit organizations may receive complaints or allegations as a result of how they handle public relations, fundraising, budgeting and setting human resources policies.

Boards of directors have the broad responsibility of overseeing all programs and services of the nonprofit, which makes them liable for all essential operations of the organization.

Are Directors and Officers Afforded Immunity Under 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.

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, employees, government regulators or others.

According to Massnonprofit.org, D&O insurance protects against, “Any actual or alleged act or omission, error, misstatement, misleading statement, neglect or breach of duty by an insured person in the discharge of his/her duties.” It also covers personnel issues, including discrimination, wrongful termination, harassment, failure to provide services and mismanaging assets.

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.

In summary, 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.

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