You might be asking yourself: why nonprofit directors & officers insurance? You’re not alone—it’s a question that comes up fairly often. It’s a complicated issue but the bottom line is that it’s a key element in protecting your board members and your organization. Consider the following essential reasons to buy and maintain directors and officers liability coverage and you’ll wonder how you ever did without.
1. Lawsuits
Non-profit organizations can be sued by donors, employees (prospective, current, or former), the general public, third parties, clients, government agencies, and just about anyone else you can think of. These lawsuits are usually directed toward the organization itself as well as one or all of the individual board members.
2. Loss of Assets
The personal assets of the individual board members are at stake! While there may be some protections for your board members under the federal Volunteer Protection Act and related state laws, the protection is far from absolute. And these laws do not protect your officers from having to defend themselves and pay legal fees in the face of a lawsuit. Directors & officers (D&O) insurance can help protect a board member’s home, investments, or other personal assets.
3. Indemnity
The bylaws of most nonprofit organizations provide some financial indemnity to the board members. But there is no guarantee the organization will have the resources to provide the indemnity. A nonprofit D&O policy will provide the financial resources for the promised indemnity.
4. Financial Burden
Under any circumstances, directors and officers lawsuits are devastating. They are made worse if the financial burden prevents the organization from providing programs and services and achieving their vision. Without the proper insurance in the place, the worst case scenario could be that the organization has to shut its doors.
5. Quick ROI
The cost of a directors and officers policy is often under $1,500, yet the average cost of a claim is over $150,000. When you consider the high cost of legal fees alongside our litigious society, it’s easy to see the value in purchasing the coverage and the potential for a quick, indispensible ROI.
6. Fuller Coverage
There is no coverage for directors and officers claims under general liability insurance. And a little known fact is that you may negate the volunteer protections laws if you fail to retain both directors and officers, as well as general liability coverage.
7. So Many Laws to Follow
Corporate scandals, high profile theft cases, and data breaches have heightened the scrutiny of all corporations—especially nonprofit organizations. There are more laws governing and regulating your business practices than ever before. You can easily face a claim for violations of the laws and regulations without even knowing you are in violation!
8. IRS Check-Ins
The IRS closely monitors nonprofit organizations and frequently audits them. Your organization has the potential of facing large IRS fines it you are audited. Not only that, but if your accounting records are found to be out of order you could face lawsuits by donors.
9. Fiduciary Duties
Your board members have serious fiduciary duties. Lawsuits against your organization and individual board members can stem from failure to act in accordance with these duties.
- Duty of Care: the responsibility to act prudently and with reasonable care with regard to management responsibilities.
- Duty of Loyalty: the responsibility not to act to further personal interests
- Duty of Obedience: the responsibility to ensure that the organization is run in accordance to its mission and bylaws and that it complies with the law
In Conclusion
Serving on a nonprofit board of directors is serious business. It’s important that the individual board members understand the risks they take to serve your organization. And it’s equally important that your organization protect your board members from these risks in the form of a nonprofit directors and officers liability Insurance policy.
