Why do nonprofit organizations need D&O insurance?
There are certain risks associated with not having D&O insurance that all nonprofits should understand.
In a recent discussion with a nonprofit organization, the topic of management liability insurance, also known as directors and officers coverage, or D&O insurance, was brought into the conversation. Too often, when asked if the board has this important type of nonprofit insurance, the answer is no. The reason is usually that it’s too expensive.
However, there are certain risks associated with not having D&O insurance that all nonprofits should understand.
What is D&O insurance for nonprofits?
D&O insurance helps protect nonprofit directors, officers and managers against exposures ranging from fiduciary malfeasance to wrongful termination claims. It helps cover the defense costs, settlements and judgments that could arise for allegations brought against a nonprofit organization.
Why nonprofits need D&O insurance coverage
As mentioned above, the simple answer is that D&O insurance protects the individual board members and their personal assets from a lawsuit. Any allegations of mismanagement, neglect or breach of duty in the course of managing the nonprofit can be directed at the board of directors both as a group and as individual members. Usually, these allegations come in the form of a lawsuit.
Allegations and claims can come from clients of the nonprofit, employees and other third parties, including government agencies, funding organizations, etc. Claims can be frivolous or severe depending on the circumstances. Mismanagement of funds, conflicts of interest, breach of fiduciary duty, wrongful termination and discrimination are some of the common reasons. All of these allegations can result in costly lawsuits against a nonprofit.
It’s a common misconception that a homeowners insurance policy will cover any claim on an individual’s actions on behalf of the board. However, homeowners insurance is solely for property and general liability insurance. It does not extend to any actions on behalf of the nonprofit’s board. If a nonprofit does not have D&O insurance, and if the claim is against a board member, personal assets are on the line.
Who will be covered by D&O insurance, and how much does it cost?
D&O insurance covers the nonprofit entity, as well as any past, present and future directors, officers, committee members, trustees, employees and volunteers. The heirs, executors, administrators and legal representatives of an insured would also be covered in the event of an insured’s death, insolvency or bankruptcy.
Premiums typically start at less than $1,000 and coverage can include legal defense costs, employment practices liability (EPLI), fiduciary liability and even cyber/privacy liability. Average claim damages will be in the tens of thousands of dollars. Having D&O insurance will provide the nonprofit risk management tools and professional help to handle the allegations in a timely manner (depending on the carrier, either they will tender the defense or will allow you to tender the defense with their guidance).
Getting started with D&O coverage
A nonprofit organization should buy D&O insurance at the bare minimum and then add other coverages depending on their size and scope of operation. It’s no secret that many nonprofits are forced to operate on scarce resources, and they tend to focus more on their operations than their risk management.
However, what many of these organizations do not realize is that without management liability insurance, the leadership team is at risk, and the nonprofit’s noble mission can be sabotaged before it really even begins.
Parvathy Sree (parvathy.sree@amtrustgroup.com) is the vice president of AmTrust Nonprofit Underwriting, where she manages growth and profitability for nonprofit’s products. She has more than 18 years of expertise in underwriting, marketing, talent management, product development, risk management and strategic planning. AmTrust Nonprofit provides insurance solutions to educational, religious, charitable and social service risks.
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