Does your organization need Directors and Officers Insurance?
One of the most important assets your nonprofit has is its board of directors. They are volunteering their time and energy to oversee your organization’s activities and decisions. The liability risks they face aren’t often realized until it’s too late. And without the right directors and officers insurance program, they could be in for a big surprise.
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. Immunity does not prevent an organization from being sued. You may be considering directors and officers liability insurance (D&O Insurance) as an added protection for the rare instance your nonprofit board is faced with a lawsuit.
Laws against discrimination and harassment apply to all employers, even non-profits. You can also be sued by employees or third parties, such as clients or vendors.
Not sure if you need this type of coverage?
Consider these important points about the VPA and D&O insurance to guide your decision.
Nonprofit Directors and officers are legally responsible for the day-to-day decision-making of their organization. Corporate responsibility applies to nonprofits just as it does to for-profit organizations. Directors and officers can be held personally liability for any breach of duty.
Understand the limits of the Volunteer Protection Act
The Volunteer Protection Act is a federal law designed to protect volunteers against allegations of harm. This law provides limited immunity for volunteers who do not receive compensation. However, it doesn’t protect against all actions and decisions. Additionally, it does not cover the cost of a legal defense.
D&O insurance is a tool that provides broad coverage to minimize potential risk and financial loss.
Weigh the potential risks
There are various risks your board of directors’ face, many of which aren’t considered until it’s too late. Examples of potential risk include:
- Employment related lawsuits such as harassment and wrongful termination
- Tax reporting and filing errors
- Failure to ensure compliance with regulations or state and local laws
- Claims of negligence in carrying out duties of care and diligence
The duties and responsibilities of nonprofit directors and officers
- Duty of Care– requires Directors & Officers to act prudently and reasonably regarding the management of the organization’s affairs
- Duty of Loyalty– prohibits Directors & Officers from using their position in the organization to further their own personal interest
- Duty of Obedience– requires Directors & Officers to ensure that the organization is run in accordance with it’s charger and bylaws, and that organization complies with applicable laws.
Claims made against your board can come from a variety of sources, external and internal. For example, employees, competitors, creditors, and tax authorities might make claims. Additionally, donors may argue funds were not used in a manner consistent with your organization’s values.
A board member’s personal assets may be at stake in a claim: retirement savings, investments, a home, could be at risk.
The board of a church was sued by several their donors, alleging misrepresentation of the financial status of the organization.
Or we have seen claims where a volunteer claimed the denial of a full-time position was due to her sex, race, and pregnant condition.
Assessing potential risk is a critical factor in deciding what type of coverage is needed and how much should be purchased. Your insurance professional can assess your risks and determine what type of policy is right for you.
Understand what Directors and officers insurance covers
D&O insurance can provide coverage for a variety of situations, but key to mitigating risk is understanding protections upfront. For example, some potential lawsuits might include claims of negligence, mismanagement, wrongful termination, employment disruptions or sexual harassment. These are sometimes excluded from D&O policies and packaged as Employment Practices Liability Insurance (EPLI). Either way, if you have a paid staff, you should get coverage (EPLI or D&O insurance).
Examples of what D&O insurance may cover include:
- Actual or alleged wrongful acts
- Decisions with unintended consequences
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. Additionally, some policies cover claims on a “claims-made basis,” which means coverage is in place if the policy is in place. Others extend the reporting period, allowing claims after the policy expiration date. Check with your insurance professional to fully understand coverage and potential limitations.
Have you ever had to fire someone?
Organizations are now more likely to be sued for discrimination, harassment, or wrongful termination than to suffer a general liability, or property loss. Directors and Officers must always act for the benefit of their organization, avoid any conflicts, or interest, and exercise the utmost skill and care in decision-making. Any perceived breach of these duties can result in a suit that will at the very least incur defense costs.
The most common claims made by employees involve discrimination, harassment, wrongful termination, retaliation, and hostile work environment discrimination.
Understand what isn’t covered
A good D&O insurance policy will cover a variety of situations. For example, does the policy include prior acts or coverage for previous board members?
Directors and officers insurance policies may have limitations and exclusions that consist of:
- Acting for personal profit
- Breach of contract
- Dishonest acts
- Intentional acts of noncompliance
- Claims made under previous policies
When you are faced with a claim, it’s important to act fast. Understanding whether a potential claim is covered will give you the guidance to plan next steps.
Understand your liability and risk exposure areas
Assess your risk exposure areas before you buy a D&O policy and be clear about what you’re buying.
- All policies aren’t created equally. A standardized D&O form doesn’t exist, and while D&O policies don’t protect against every potential risk, matching the right risks to the appropriate policy helps mitigate those risks in the future.
- Avoid selecting a policy solely based on price. Price is important. But it’s also critical to weigh that price against potential scenarios for loss. What specific scenarios do your board members face? If the likelihood of specific situations is high, then it’s critical to select a policy that covers those situations even if the cost of coverage is higher.
Selecting a policy that doesn’t provide adequate protection could be a costly mistake in the future.
Moving forward with greater protection
A company is never “too small” for D&O insurance. Nearly 85% of nonprofits have an annual budget that is less than the average cost to defend a claim. General liability insurance typically covers limited situations, such as those related to bodily injury or property damage. Many scenarios aren’t covered under this general type of protection.
Call Huff Insurance Today For Your D&I Insurance
Call us now at 410-647-1111. Our insurance professionals can ask the right questions to understand your business’ risk exposure.
Talk with us about their prior experience with D&O claims to find out where coverage is critical to mitigate loss.
Providing complete coverage ensures peace of mind to those who voluntarily invest their time serving the interests of a company.