A Guide to Directors’ and Officers’ Insurance for Nonprofits

Non-profit organizations rely on their leadership to make important decisions and guide the organization toward its goals. However, these leaders may face legal liabilities for their actions, which is why directors’ and officers’ insurance is essential. Learn more about this type of insurance and how it can protect non-profit organizations and their leadership.

What is directors’ and officers’ insurance for non profits?

Directors’ and officers’ insurance, also known as D&O insurance, is a type of liability insurance that provides financial protection for the directors and officers of a non-profit organization.

Why is it important for non-profit organizations?

Non-profit organizations depend on the leadership of their directors and officers. They are the guiding force behind the non-profit and they make important decisions about the organization’s operations. Directors’ and officers’ insurance is a protection mechanism for these leaders because they can be held personally liable for any mistakes or wrongdoings that occur within the organization. D&O insurance provides a layer of protection for both the leaders and the organization, ensuring they can continue to operate and fulfill their mission without the potential financial risks.

What does directors’ and officers’ insurance cover?

This insurance covers legal defense costs and damages that may arise from lawsuits or claims against the organization’s leadership. D&O insurance is designed to protect the personal assets of directors and officers and the organization itself.

D&O insurance can provide coverage for various situations, but understanding protections upfront is key to mitigating risk.

Examples of what directors’ and officers’ insurance may cover include:

• Actual or alleged wrongful acts
• Decisions with unintended consequences
• Omissions

A typical policy may include coverage for the defense costs and financial losses resulting from a claim within the limits of liability stated in the policies. Claims involving potential lawsuits might include negligence claims, mismanagement, wrongful termination, employment disruptions, or sexual harassment. These are sometimes excluded from D&O policies and packaged as Employment Practices Liability Insurance (EPLI). We recommend coverage (EPLI and/or D&O insurance) if you have paid staff.

What is not covered by directors’ and officers’ insurance?

A D&O insurance policy will cover a variety of situations. For example, does the policy include prior acts or coverage for previous board members?

D&O policies may have limitations and exclusions that consist of the following:

• Acting for personal profit
• Breach of contract
• Dishonest acts
• Fraud
• Intentional acts of noncompliance
• Claims made under previous policies

When faced with a claim, it’s crucial to connect with your insurance agent or insurance company quickly. Understanding the coverage for a potential claim will guide you in planning the next steps.

Three reasons to consider directors’ and officers’ insurance for your nonprofit

1. Directors and Officers are at risk due to their activities with your organization.

We are grateful to the non-profits that serve our communities and the people who step up and take leadership roles. A nonprofit board of directors is one of the most important assets. Board members volunteer their time and energy to oversee the decisions and activities made by your organization. The liability risks directors and officers face aren’t often realized until it’s too late – and unfortunately, they happen without the right protection.

2. The Volunteer Protection Act (VPA) may not provide enough protection.

You might think board members are covered against whatever claims arise under the federal Volunteer Protection Act (VPA), but this isn’t always the case. You may consider directors and officers liability insurance (D&O) as an added protection for the rare instance your nonprofit board is faced with a lawsuit.

3. Nonprofit organizations are not immune to lawsuits.

Both for-profit and nonprofit organizations face potential liability lawsuits. According to Towers Watson S&O Liability Survey, 85% of claims are employee related. Nonprofits also face liability claims from vendors, competitors, donors and stakeholders, and government regulators.

Examples of directors’ and officers’ insurance claims:

Employee-related claims top the list of common D&O-related claims.
As with any organization, whether for-profit or nonprofit, employee relationships present a risk, especially if an employee feels the organization was negligent or responsible for hurt or injury to the employee. This includes mental, emotional, and physical harm. Examples of employee-related claims include:

• • • • Wrongful dismissal
      • Discrimination or harassment
      • Breach of employment contract
      • Failure to address health and safety concerns

Claims filed by competitive organizations.
Non-profits are not unlike for-profit organizations when it comes to competition. Sometimes competitive organizations may feel wronged and file a lawsuit related to perceived wrongdoings such as

• • • • Breach of intellectual property
      • Misuse of trade secrets
      • Anti-competitive acts

Claims filed by shareholders.
High-level shareholders feel a real stake in the organizations they support and are likely to keep a close eye on operations and the board of directors who run them. This scrutiny leaves directors and officers vulnerable to potential lawsuits.

Activities conducted by your organization can open you up to lawsuits. If you’re not sure if you need this type of coverage? Consider these important points about VPA and D&O insurance to guide your decision.