How would you like to be held financially responsible for a bad decision made by a co-worker? It sounds like a nightmare, but for non-profits without directors and officers insurance, it can quickly become a reality.
Non-profits commonly overlook directors and officers liability insurance because leaders may assume they’re automatically covered under the Federal Volunteer Protection Act (FVPA). While the FVPA does protect volunteers against allegations of harm, it doesn’t necessarily cover directors and officers from all actions and decisions in their duties, nor does it cover defense costs.
Is directors and officers insurance required for non-profit organizations?
Not every non-profit needs directors and officers insurance, but it’s always highly recommended. As mentioned above, many actions and decisions made by non-profit leaders aren’t covered under the FVPA. Regardless of non-profit size, directors and officers of every non-profit are exposed to risks because they’re decision-makers. While directors and officers liability insurance will not prevent claims from occurring, it can mitigate the high costs associated with defending claims.
What is non-profit D&O liability insurance?
Non-profit directors and officers (D&O) insurance is a type of liability insurance that provides personal financial protection for non-profit officers and directors. This type of coverage is designed to protect board members, directors, officers, and managers from allegations of wrongdoing brought against them regarding their role in the organization’s governance.
What is covered by directors & officers insurance?
No single directors and officers insurance policy looks the same as another. However, all D&O insurance policies generally cover the same common risks, such as:
- Claims of financial loss resulting from mismanagement
- Liability due to negligent acts
- Omissions
- Misleading statements that result in lawsuits against the company
- Mismanagement of funds or investments
- Self-dealing
- Employment issues, including harassment and discrimination
- Failure to provide services
- Failure to fulfill fiduciary duties
What kind of insurance should a non-profit have?
The short answer is, “It depends.” There are three different types of D&O insurance available.
- Corporate reimbursement coverage indemnifies directors and officers of an organization for claims resulting from their acts on behalf of the organization and, in some cases, is mandated by state statute.
- Side-A coverage comes into play to provide D&O coverage for personal liability when directors and officers are not indemnified by the firm. Non-profits need this coverage when they are either financially unable to indemnify their directors and officers or are prohibited from doing so.
- Entity coverage is designed to cover the organization directly in addition to its directors and officers.
Are non-profit board members held personally liable?
If your organization is incorporated, you most likely will not be held personally accountable for debts or liabilities that belong to the non-profit. That being said, there are exceptions to that statement. Some examples of exceptions include:
- If a non-profit leader personally or directly injures someone.
- A non-profit leader personally guarantees a bank loan or business debt on which the non-profit defaults.
- Failure to ensure the non-profit deposits taxes or files tax returns.
- Mixing of non-profit and personal funds.
- A director or officer purposely does something fraudulent, illegal, or just all around wrong.
You can read more information on personal liability here.
What’s the difference between D&O and E&O insurance?
Directors & officers insurance and errors & omissions insurance are similar in that both coverages help protect the leaders of a non-profit organization. However, they each protect against different things.
- Errors and omissions insurance is designed for professionals at large. It protects your non-profit from lawsuits that claim you or your employees made a mistake, error, or omission in your professional services. Click here to learn more about errors and omissions insurance.
- Directors and officers insurance is a type of errors and omissions insurance designed so leadership members within a non-profit are not held personally liable for management decisions.
How are you at risk?
Large numbers of directors and officers lack experience or sufficient knowledge of their legal duties and responsibilities, many of which place them at risk of allegations. From setting the organization’s policies and procedures to budgeting and human resources, directors and officers are liable for all essential operations of the organization.
Insufficient experience or knowledge could lead to significant complaints or claims against the nonprofit. With the average claim against non-profit directors and officers costing around $35,000 to settle, it is necessary for non-profit organizations of all sizes to secure D&O insurance.
There is no standardization of policy forms for D&O coverage, so reviewing your risks with your insurance advisor is essential. Policies vary in terms, conditions, and scope of coverage. A good insurance agent can help you make an informed decision in choosing a policy that is tailored to the specific risks you face, both personally and professionally.
A D&O policy doesn’t protect against everything; however, a properly tailored policy can significantly reduce the risks your directors and officers face.
Contact your Griffin Owens insurance advisor to learn more about this important coverage.
