Why Your Nonprofit Needs D&O Insurance

People who run nonprofit organizations have many enormous responsibilities to juggle every day. This includes managing budgets, engaging volunteers and contributors, reaching out, serving those in need, etc. But with great responsibility comes great risk — according to a recent Towers Watson Directors & Officers (D&O) Liability Survey, 63 percent of nonprofit organizations reported a D&O claim in the past 10 years. 85% of these claims were employment related, and D&O claims are filed twice as much in nonprofits than in private companies.

“Neglecting to prepare for such claims can lead to financial trouble for an organization and its leadership,” Insurance Journal states. If you are a nonprofit, an independent insurance agent can help educate you on important risks and liabilities.

Director and Officer Insurance for Nonprofits

With claims of misappropriation of technology, improper payments, cyber and privacy issues, fiduciary responsibility, nonprofit directors and officers face significant lawsuit exposure. When they do occur, these suits can result in millions in civil penalties, not to mention the cost and headache of a defense. Your board is one of your most valuable assets — D&O insurance protects them.

Directors and Officers Insurance, also known as D&O Insurance, is a type of liability insurance designed to protect the personal assets of your board of directors and company officers in the event they are sued for actions or decisions made in their capacity as directors and officers. Generally, it is used in claims resulting from managerial decisions that have adverse financial consequences. It can cover attorney fees, court costs, settlements and judgements in cases of discrimination, defamation, and mismanagement of funds. Coverage can also extend to legal defense costs arising out of criminal and regulatory investigations/trials.

Who Can Sue a NonProfit?

Due to the fiduciary and legal responsibilities nonprofit directors and officers have, there are several parties that can file against them as claimants in a lawsuit. This includes donors, contributors, beneficiaries, recipients, regulatory bodies (ie, government officials from entities like the Department of Labor), board members of the nonprofit, employees, and third party affiliates.

Can It Happen To My NonProfit?

Yes, a lawsuit can happen to any nonprofit organization. You may not hear about it in the news too much, but it does happen, and more often than you may think. Here are a few examples of lawsuits that have happened over the past few years:

Last week, the New York Times released an article about a lawsuit involving Fidelity Charitable, the country’s largest charity by assets. The donors made a $100 million gift in 2017 to organizations that combat Lyme disease, and chose Fidelity Charitable to distribute the money. The donors contend their donation was mishandled, costing the charities they wanted to support millions of dollars. They sued Fidelity Charitable, which says it followed the law.
Earlier this month, Pacific Business News reported that Kaiser Foundation Health Plan is suing The Queen’s Health Systems, alleging the Honolulu-based nonprofit organization notified Kaiser of plans to unfairly bill patients.
In April 2017, the Penn Record reported that an employee filed a class action lawsuit against Northern Children’s Services, a nonprofit children’s therapy center, citing alleged unpaid wages, violation of applicable minimum wage law and violation of the Workers’ Compensation Act.
In May 2017, the former executive director of Aspen Film is sued the nonprofit, alleging the embattled organization terminated him illegally, the Aspen Daily News reported.

Should Nonprofits have D&O Insurance?

There have been more over 1,500 D&O claims every year since 2010. More than 60% of these claims were directed at nonprofits. The most common D&O claims in the nonprofit sector are misappropriation of funds, bankruptcy, and regulatory investigations. Typical D&O claims can reach six figures.

Here’s one scenario: a nonprofit has hosted a popular concert series for more than 40 years, which raises more than half a million dollars each year for the organization’s programs. After ending a relationship with a vendor that supported the concert series, the nonprofit was unexpectedly sued. Due to proactive risk management planning, the organization was prepared for and protected against the lawsuit. With the right D&O insurance coverage, the organization made sure the money raised through the concert series was dedicated to the visitors’ experience rather than paying legal fees.

After ending a relationship with a vendor that supported the concert series, the nonprofit was unexpectedly sued.

Here is another very real scenario: a non-profit association is named in a lawsuit filed by its members. The lawsuit alleges the recent election of a new Executive Director violated the procedures articulated in the association’s bylaws. This costs the organization over $100,000.

Facts About D&O Coverage

There is no one standard D&O policy, each carrier has different forms. Your best bet is to rely on an experienced broker, such as HCP, to be sure you have proper coverage and limits and the right blend of risk tolerances versus cost. That said, here are some quick facts to get you started. D&O policies:

Contain “shrinking limits” provisions, meaning that defense costs — which are often a substantial part of a claim — reduce the policy’s limits. This is different than general liability where defense is covered in addition to the policy limits.
Are written on a claims-made basis.
Usually contain no explicit duty to defend the insured (when covering for-profit businesses).
Cover monetary damages but exclude bodily injury and property damage.