Nonprofit organizations provide critical services to local communities and the nation as a whole. However, providing these essential services does not come without risk. Like all businesses, the directors, officers, and other board members of a nonprofit may be held personally liable for financial damages. Depending on the size of the nonprofit, the risk encountered by nonprofits could be substantial. D&O insurance can help protect board members against certain legal costs if they are held liable for a decision made while working for the company that resulted in a financial loss.
What Is D&O Insurance?
Directors and officers (D&O) insurance is a type of liability insurance coverage that aims to protect employees from personal losses in the event that they encounter a lawsuit when serving as a director or officer for a business. D&O insurance may also cover legal fees and other expenses the organization may incur from the suit.
D&O insurance covers any person that serves as a director or officer for both for-profit and nonprofit organizations. Coverage often extends to regulatory and criminal investigations, as well as trial defense costs. Criminal and civil actions are commonly brought against directors and officers at the same time.
Directors and officers of a nonprofit organization may be sued by vendors, employees, competitors, customers, investors, or other parties for alleged or actual wrongful acts when managing a business. The insurance covers directors, officers, and the company, including any legal fees and settlements the organization may face.
D&O insurance can be useful in a wide range of circumstances, including the following events:
- Misuse of company funds
- Breach of fiduciary duty that caused a financial loss or bankruptcy
- Misrepresentation of company assets
- Theft of intellectual property
- Failure to comply with certain workplace laws
- Lack of corporate governance
Why Nonprofits Need A D&O Insurance Policy
Nonprofit organizations are not legally required to have D&O insurance. However, it is highly recommended to prevent significant financial losses resulting from lawsuits. Whether a nonprofit is still in the early planning stages or has been established for many years, the business will ultimately require a board of directors to offer insight and guidance. D&O insurance acts as a recruitment tool when attracting professionals to work for the organization.
It is easy to believe that any decision that a director or officer makes during the course of business is covered by standard business insurance. However, most commercial general liability insurance policies exclude financial consequences caused by alleged misdeeds. If a lawsuit is filed against a specific director or officer, the defendant’s personal assets could be at risk. If a lawsuit is filed against the nonprofit and not anyone, the court could still find a director or officer responsible.
D&O claims can also be very costly, especially for larger nonprofits. According to a Chubb Private Company Risk Survey, the average cost of a D&O claim is a minimum of $35,000 to $100,000. For a small or startup nonprofit, this amount could easily lead to bankruptcy. It is important to remember that if a claim made against a nonprofit is not valid and no money is ultimately paid out, the organization will still be responsible for the cost of litigation and related expenses.
Claims Typically Covered By D&O Insurance
Director and officer insurance policies cover various claim types that may have led to negative financial consequences for the organization or its stakeholders, such as alleged or actual wrongful acts, omissions, or decisions.
Most insurance policies are written to cover claims made on a “claims-made basis,” referring to claims that are made only while the policy is in effect. Some policies may offer an extended reporting period when claims can be reported even after the policy has expired. D&O policies may even cover claims for wrongful acts that may have taken place before the start date on the policy, known as the retroactive period.
D&O insurance does not cover all types of claims, including claims that arise from property damage, bodily injury, breach of contract, acting for personal profit, fraud, pollution, dishonest acts, claims covered by other insurance, or claims made under a previous policy.
Reach Out For A Commercial Insurance Policy Quote Today
Business owners should consider acquiring a directors and officers insurance policy as soon as the nonprofit organization develops a leadership structure, specifically a board of directors. D&O insurance can provide existing directors and officers with peace of mind that their personal assets are not at risk, and provide protection for the nonprofit organization as a whole.
To learn more about why nonprofits need to acquire D&O insurance or speak with a directors and officers insurance professional, reach out to the commercial insurance brokers at CI Solutions by calling 703.988.3665 or apply for a quote online today!