Directors and Officers (D&O) insurance is a type of liability policy that protects the personal assets of an entity’s directors and officers as well as their spouses should they be personally sued by customers, competitors, vendors, investors, employees, or other parties for any actual or alleged wrongful acts in their management of the nonprofit organization.
However, it is not just for-profit organizations that should secure a D&O policy; nonprofits also need this type of protection. In fact, a survey by the Insurance Information Institute found that 58 percent of the companies that had a D&O claim in the previous five years were nonprofits. (1)
Here is a glimpse at what D&O insurance looks like for nonprofits.
What Does Directors And Officers Insurance Cover?
D&O insurance covers a broad range of alleged or actual acts on the part of directors and officers, including:
- Misusing the organization’s funds
- Failing to comply with workplace laws
- Breach of fiduciary duty leading to financial loss or bankruptcy
- Theft of intellectual property
- Misrepresenting the organization’s assets
This type of insurance does not cover illegal acts.
Does Every Nonprofit Need Directors And Officers Insurance?
Nonprofit organizations are often looking for ways to minimize expenses, and some smaller nonprofits believe that insurance is one area where cost savings can be made. However, the directors of even the smallest nonprofits can be sued over their management of the organization’s affairs.
In many cases, smaller organizations need this protection just as much, if not more, than bigger nonprofits because they have limited resources for defending themselves in these situations. Every organization is vulnerable to D&O insurance exposures.
Nonprofit D&Os liability does not just cover the costs of defense, settlements, and judgments linked to claims against these organizations, but it also protects the personal assets of the nonprofit’s directors and board members.
Why Are Nonprofit Executives At Risk?
Nonprofit executives carry out a broad range of functions, such as establishing policies, handling public relations, budget management, fundraising, determining human resource policies, and overseeing services and programs. As a result, they carry a major liability risk because they tend to be the primary individuals implementing policies and procedures. Even when a single employee is at fault, the executive often takes the blame when a claim is made against their organization.
How Do Nonprofits Obtain Directors & Officers Insurance?
Nonprofits can purchase D&O insurance as a separate policy or bundled alongside other types of coverage, such as general liability. It is typically purchased by the nonprofit on behalf of its officers and directors. Many non-profits should consider purchasing employment practices liability along with D&O insurance.
Nonprofits should look for a policy that includes broad coverage for all types of employment-related actions. This includes harassment, failure to hire, discrimination, and wrongful termination. It should pay for defense expenses as they are incurred rather than on a reimbursement basis.
Although D&O insurance cannot prevent claims from occurring, it can mitigate the high costs of defending such claims. The greatest cost associated with these claims is typically the legal defense, and a D&O policy can reimburse the directors and officers involved in the suit or the nonprofit itself.
For example, should a nonprofit’s top executive be accused of mishandling donations, this type of policy could cover the full cost of defense up to the limit of the policy. In the event that the judge rules in favor of the claimant, it will reimburse the executive or the nonprofit up to the remaining limit of the policy if the incident was deemed not to be intentional.
How Much Can Nonprofits Expect to Pay For Directors & Officers Insurance?
D&O policies are generally relatively inexpensive for the majority of nonprofit organizations. Although there may be specific risk factors for certain nonprofits that raise their cost, the premiums do tend to be less expensive overall than many other types of policies.
Size is one of the biggest determinants of the cost of insurance with smaller private nonprofit organizations tending to pay a lot less than larger organizations. Another factor is the coverage limit that the organization purchases, with higher limits carrying a greater price tag. In addition, the way that the organization approaches its communications is a factor. Nonprofits that have a clearly written policy related to hiring and firing practices tend to have a lower risk factor and more affordable premiums.
Get In Touch With The Nonprofit Insurance Professionals
To learn more about how D&O insurance can protect your nonprofit organization, get in touch with the professional insurance brokers at CI Solutions today. CI Solutions provides clients with the personalized care offered by local agencies backed by the experience of a larger brokerage.