Directors' and Officers' liability insurance (or D&O) protects non-profit organizations (NPOs) and their boards against risks not covered by general liability insurance. So it wasn’t surprising when a 2021 survey conducted by The Mahoney Group found that nearly two-thirds (64%) of nonprofit organizations purchased D&O.
If you’ve yet to consult your insurance company about a D&O policy, this article will help you understand the importance of protecting your organization. We also look at what Directors' and Officers' liability insurance for nonprofits typically covers and the benefits you can expect.
Why Directors and Officers insurance for nonprofits is crucial
Directors and officers (like your treasurer, for example) are at the heart of every nonprofit. Not only do they guide an NPO’s mission, but they also oversee its programs and services. This makes your board of directors liable for a wide range of operational duties, including:
- Setting policies and procedures
- Approving budgets
- Determining worker policies
Since board members are legally required to carry out their duties properly and without conflict of interest, they’re unusually vulnerable to legal claims involving wrongful acts. Carrying out their duties necessarily must involve upholding fiduciary duties to the organization, which include:
- Duty of Care: Obligates them to act with the same care that a reasonably prudent person would exercise in a similar position and under similar circumstances.
- Duty of Loyalty: Requires them to act in the best interests of the organization, avoiding conflicts of interest and self-dealing.
- Duty of Obedience: Mandates adherence to the organization's mission, bylaws, and applicable laws and regulations.
Failure to uphold these duties can lead to personal liability. Specifically, these claims can include:
a. Breach of Fiduciary Duty
- Negligence: Failing to exercise due diligence in decision-making processes.
- Conflicts of Interest: Engaging in transactions that benefit personal interests over those of the organization.
- Misappropriation of Assets: Unauthorized use of the organization's funds or property.
b. Mismanagement of Funds
- Improper Financial Practices: Inadequate oversight of budgeting, accounting, and financial reporting.
- Violation of Donor Restrictions: Misusing funds designated for specific purposes.
c. Regulatory Non-Compliance
- Tax Laws: Failing to comply with tax-exempt status requirements or improper filing of tax returns.
- Employment Laws: Violating labour regulations, including wage laws, discrimination statutes, and workplace safety standards.
- Licensing and Permits: Operating without necessary governmental approvals.
d. Employment-Related Claims
- Discrimination and Harassment: Claims arising from violations of equal employment opportunity laws.
- Wrongful Termination: Unlawful dismissal of employees without proper cause or due process.
- Retaliation: Punishing employees for whistleblowing or asserting their legal rights.
e. Torts and Personal Injury
- Negligence: Failure to maintain safe premises or operations leads to third parties' injury.
- Defamation: Making false statements that harm an individual's reputation.
- Privacy Violations: Unauthorized disclosure of personal information.
f. Intellectual Property Infringement
- Copyright Violations: Using protected works without permission.
- Trademark Infringement: Unauthorized use of another entity's branding.
g. Ultra Vires Acts
- Exceeding Authority: Actions taken beyond the scope of the organization's charter or bylaws.
As a result, having D&O insurance is crucial for protecting your nonprofit against actions or consequences arising from decisions or omissions made by your board.
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What does D&O insurance cover?
While you should speak with your broker about specific coverage, once your application form has been approved, you can typically expect D&O insurance to financially safeguard your nonprofit from lawsuits involving:
- Third-party claims of defamation or alleged losses. These often revolve around improper financial acts, errors, omissions, misstatements, or misleading statements.
- Neglect of duty or breach of trust. This could include failure to follow provincial or federal laws and regulations, for example, or claims involving mismanaged funds (like if a donor or creditor were to suspect products or services were being purchased from a board member’s business)
- Improper human resources or employment practices. Think discrimination, harassment, unsafe work practices, or wrongful dismissal.
Although Directors' and Officers' insurance for nonprofit boards can’t prevent claims from happening, it can mitigate the high costs of defending against those claims while protecting board members’ personal assets.
Four main benefits of Directors and Officers insurance for nonprofits
1. Protects against legal costs and financial loss
Despite being volunteers in many cases, your board can still be held personally liable for allegations brought against your organization.
D&O business insurance helps to protect nonprofit board members from personal financial loss by covering the costs of legal liabilities in the event of a claim.
These typically include:
- Defense costs and other legal fees
- Financial settlements
- Damage awards arising from judgements
This can potentially make D&O coverage extremely cost-effective in the long run.
2. Mitigates risk related to errors
Many NPOs struggle to find the highly skilled staff that they need. Since that means they won’t always have trained accountants or financial professionals handling their books, they’re at greater risk of committing tax or financial reporting errors.
One of the main reasons to get Directors and Officers insurance for your nonprofit is that it can prevent unintentional mistakes from bankrupting your organization.
There’s also the added benefit that individuals and foundations are more inclined to support NPOs with financial protection. By defending against fraudulent claims, D&O insurance helps keep your giving pipeline intact and secure.
3. Makes it easier to recruit and retain talent
Having directors or officers with business or legal expertise overseeing your nonprofit’s day-to-day operations helps to ensure its success.
Since qualified professionals will feel far more comfortable working with you if they know they’re financially protected against privacy or legal disputes, maintaining D&O liability insurance can make recruiting and retaining talented board members easier.
4. Provides peace of mind
How much is peace of mind worth to your organization? That’s essentially what you’ll gain from D&O coverage: reassurance that your nonprofit will be shielded from legal expenses or financial damages if you’re sued.
Even if an allegation against your organization is unfounded, it’s important to recognize that the costs of the lawsuit remain.
Investing in D&O insurance as part of your NPO’s risk management plan frees you to focus on providing services and carrying out your mission—without worrying about the threat of financial repercussions.
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