Why Do Nonprofits Need D&O Insurance?
After manufacturing and retail, the U.S. nonprofit sector—1.5 million organizations strong—is the country’s third largest source of jobs. A tenth of the American workforce works in nonprofits. And 63 million adult Americans volunteer for these organizations.
Nonprofits are exempt from certain exposures publicly traded companies and even private businesses face. But almost any organization dealing with money, employees, and/or volunteers is subject to risk with a Directors and Officers (D&O) liability claim.
Who May File a D&O Claim Against a Non-Profit
Any stakeholder in a company may file a lawsuit against a board member.
- Employees, current and former
- Donors and contributors
- Beneficiaries and recipients of the nonprofit’s work
- Members, if the nonprofit is a membership organization
- Regulatory bodies such as jurisdictions, states, and federal entities
- Third-party affiliates such as vendors, fundraisers, and affiliated nonprofits
Securing D&O coverage for nonprofit organizations is the best way to protect board members, paid or volunteer, from suffering damages as a result of claims brought against them and their organization.
How Much Does a D&O Claim Cost Without Insurance?
The costs associated with a D&O claim are likely higher than most nonprofits can afford.
According to research by Nonprofit Quarterly, a claim with merit ultimately costs a small or medium organization between $150,000 and $200,000 dollars, on average, to resolve. For allegations that go no further than a complaint to a government labor agency, the average cost is still $6,500.
D&O liability insurance provides vital protection for the nonprofits that don’t have the discretionary funds needed to cover such expenses.
What D&O Exposures Do Nonprofits Face?
While nonprofits are able to avoid many risks, they face many others, including the general risks all businesses run. Some risks are unique to nonprofits.
Nonprofits must be aware of three main types of exposures: fiduciary liability, governance liability, and employment practices liability.
Fiduciary liability refers to claims alleging fraudulent use of donor contributions and grant funds, or improper financial oversight of finances. Organizations can still be held liable for alleged fraud even if the accused is a third party and not a direct employee.
Fiduciary liability also covers such allegations as:
- Failure to report revenue
- Failure to report payroll tax
- Improper fundraising
- Attorney general investigations
Fiduciary liability also covers the fiduciaries of any employee benefit plan, including retirement plans and employee welfare benefit plans. It includes protection on such issues as:
- Improper denial of benefits
- Improper advice and counsel
- Imprudent selection and monitoring of third-party providers
Uninsured board members can be held personally liable for a mistake in managing or operating the plan, for or a perceived breach of fiduciary duty.
Governance liability refers to claims concerning management and general governance (strategic leadership) decisions. While similar to fiduciary duty, it’s an indirect accusation, often referring to failures in financial and accounting controls.
If a nonprofit organization files for bankruptcy, upset donors who’ve made large contributions may file a lawsuit holding board members accountable. In such a case, D&O insurance for nonprofit board members would prove an important tool for protecting their personal assets.
Employment Practices Liability
Employment practices liability claims are the most frequent, and can also be the most costly.
An organization’s employees can file claims resulting from activities surrounding their employment. This same standard applies to any individual officially volunteering for an organization.
The claims a nonprofit organization’s employees, paid or unpaid, may make against directors and officers include:
- Wrongful termination
- Discriminatory hiring practices
- Failure to promote
- Misattribution of employment
- Libel, slander, or false prosecution
- Sexual harassment, mental anguish, or emotional distress
- Plagiarism, misappropriation of ideas, or copyright infringement
As employment laws and government regulation become more complex, board members must seek D&O liability insurance for non-profits to protect their personal assets.
Don’t Let Your Nonprofit Clients Go Unprotected
To find out more about D&O insurance for nonprofits, as well as to find policies that work for your nonprofit clients no matter their size, contact a ProWriters expert today.