That makes directors and officers liability insurance, commonly called D&O insurance, an important part of a nonprofit’s risk-management program. The coverage may help protect board members, officers and the organization when they are sued over decisions or actions taken while managing the nonprofit.
Nonprofits frequently recruit board members because of their commitment to the organization’s mission, community connections or professional expertise. But some may have little experience serving on a board and may not fully understand the legal and fiduciary responsibilities that come with the position.
Yet these leaders may be responsible for overseeing nearly every essential aspect of the organization, including its finances, fundraising, programs, policies and procedures, human resources and relationships with donors and vendors.
Where lawsuits can come from
Nonprofits may assume their charitable mission or limited financial resources make them unlikely targets for lawsuits. However, claims can come from employees, volunteers, donors, vendors, members, competitors, regulators and others.
Allegations against nonprofit directors and officers may include:
· Mismanagement of funds or investments,
· Breach of fiduciary duty,
· Negligent acts or omissions,
· Misleading statements,
· Conflicts of interest or self-dealing,
· Improper use of donated funds,
· Failure to provide promised services, and
· Employment-related allegations such as discrimination, harassment, retaliation or wrongful termination.
Even a well-intentioned decision can lead to a dispute. A donor, for example, may challenge how money was used. A former employee may allege that a termination was discriminatory. Members may sue over changes to organizational policies or decisions affecting their membership.
Allegations do not have to be proven for a nonprofit to incur substantial legal expenses. According to the nonprofit publication Blue Avocado, the average claim against nonprofit directors and officers costs about $35,000 to settle, while the cost of one in 10 reaches $100,000 before settlement. Defense expenses alone can create a significant financial burden for a smaller organization.
How D&O coverage may help
Depending on the policy and circumstances, D&O coverage may help pay for attorneys’ fees, investigations, court costs, settlements and judgments. Some policies also provide coverage directly to the nonprofit organization.
Employment-related claims deserve particular attention. Nonprofits with employees may face allegations involving hiring, termination, discrimination, harassment and retaliation. In some cases, claims may also arise from work involving volunteers or clients. As a result, D&O insurance is often packaged with employment practices liability coverage.
Federal and state laws may provide nonprofit volunteers with certain liability protections, but those protections are not absolute andmay not cover the cost of defending a lawsuit. Nonprofit managers should not assume volunteer status alone provides sufficient protection.
The takeaway
D&O insurance cannot prevent a board member orexecutive from being sued. It can, however, provide an important financial backstop if someone brings an action.
Nonprofit managers should work with their insurance professional to review who is insured, the policy’s limits and exclusions and whether employment practices liability is included.
To reduce the likelihood of disputes, nonprofits may:
· Establish clear policies on what board members can and cannot do,
· Train board members about their fiduciary responsibilities and potential liability,
· Document board and management decisions and the rationale for those decisions, and
· Enforce procedures for financial and employment decisions.
Your organization’s leaders devote their time and expertise to advancing its mission. Make sure they have appropriate liability protection to ensure that one lawsuit does not put their financial security or the nonprofit’s mission and existence at risk.
