Insurance for non profit board of directors

Why directors & officers insurance is essential for any nonprofit

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Directors and Officers Insurance — also known as D&O Insurance — protects your organization and its board members from costs caused by legal liabilities. In the case of a lawsuit, not having D&O insurance in place could tie up your whole organization and impact those who need your services. It can also put your organization's (and its board members') assets in jeopardy. 

This article discusses what D&O Insurance covers and why it’s essential for nonprofits.

What situations does Directors and Officers Insurance cover?

At your nonprofit's core is its board directors and officers. These individuals lead the direction of the organization's mission and policies and have a legal responsibility to perform their duties in good faith and free of conflict of interest. Board members may decide on employee policies, how budgets are spent, and what assets are purchased. In the process, board members — even if they're volunteering — open themselves to unique liabilities. 

Generally, D&O Insurance protects against risks not covered by a general liability policy. Actions or consequences of board decisions or omissions often fall into this category. D&O Insurance covers situations such as: 

• Improper employment or human resource practices such as wrongful dismissal, discrimination, harassment, or unsafe practices
• A belief by donors or creditors that funds are being mismanaged
• Defamation
• Breach of fiduciary duties or issues related to a conflict of interest. This could be where a nonprofit purchases products or services from a business owned by a board member

What does D&O Insurance do for nonprofits?

Peace of Mind: D&O Insurance would pay for legal fees or damage awards related to a lawsuit. Even if a claim is unfounded, the costs associated with legal disputes remain. D&O Insurance, as a result, provides peace of mind for nonprofits so that they can focus on delivering their services. 

Attract and retain talent: Having qualified professionals on your nonprofit’s board can ensure your organization's success. It's helpful to have board members with business or legal expertise for day-to-day operational issues. D&O Insurance can help attract and retain such talent. Directors and officers feel more confident about their work on a nonprofit board when they understand they're protected in case of liability and legal disputes.

Mitigate Risks: D&O insurance may be even more critical for nonprofits than for for-profit companies. Sometimes, a nonprofit board is composed of dedicated volunteers who have a less formal understanding of employment laws or financial accounting. In this case, D&O Insurance can ensure that mistakes won't result in your organization's bankruptcy. 

Directors and officers of your organization's board may take actions that result in a lawsuit against them or the nonprofit. D&O Insurance is critical to protecting your board members and your nonprofit from legal liabilities not covered by general liability insurance. This coverage also helps recruit and retain talent for your organization and provides peace of mind for all stakeholders so that your organization can focus on delivering its services. 

APOLLO is Canada’s leading online insurance company. Our proprietary platform, the APOLLO Exchange, allows insurance agents and their customers to purchase their insurance policy immediately, from anywhere, on any device, 24/7. We provide competitive insurance rates (including D&O Insurance) for charities and nonprofits - check us out here!

Guest contributions represent the personal opinions and insights of the authors and may not reflect the views or opinions of Imagine Canada.

Emily Gracia has worked at numerous technology companies as part of their digital marketing and content creation teams, and uses her skills to help partners strategically grow and reach their networks. As a part of the Partnerships team at APOLLO, she is focused on helping to create value through marketing and cultivating digital content initiatives. She studied Commerce at the University of Victoria.

Non-profit organizations play an important role in making our local communities, nation, and the world better places to live. Because they focus on contributing to the wellbeing of society, non-profit organizations are sometimes reluctant to spend part of their budget on the purchase of an insurance product designed to protect the personal assets of their Board of Directors.

Yet non-profits recognize the importance of Directors and Officers (D&O) Liability Insurance, as evidenced by a recent benchmark survey of non-profits by The Mahoney Group and other brokerages in the Assurex Global network. The survey revealed that 64 percent of the non-profit organizations surveyed purchased D&O insurance.

Directors and Officers liability insurance protects the individual members of the Board of Directors, the management of an organization, and the organization itself against allegations that the organization was mismanaged. D&O coverage covers claims made by a third party for alleged losses caused by management’s acts, errors, omissions, misstatements, or misleading statements. Sources of claims against the directors and managers of a non-profit organization can include creditors, local or state officials, and members of the public.

Among the many reasons claims are filed are:

• Failure to adequately protect vulnerable clients
• Failure to maintain adequate financial records
• Discrimination
• Jeopardizing the organization’s tax-exempt status.

Here are five reasons that non-profit organizations need to purchase D&O insurance.

1. Protect the Entity

Regardless of the good intentions of the non-profit’s mission, Directors and Officers claims happen. According to the Chubb Group, non-profit D&O claims constitute almost two-thirds of their D&O claims. Even if the legal justification of the claim is bogus, litigation is expensive. In the absence of insurance protection, such litigation will adversely affect the non-profit organization’s budget, jeopardizing its ability to achieve its mission.

2. Protect the Current Directors

Non-profit directors and officers are often volunteers who work for little or no compensation. Yet by agreeing to serve on the board, they put their personal assets at risk. The bylaws of the non-profit often call for the organization to indemnify its board members from loss. Yet, few entities have the financial wherewithal to do so in the absence of directors and officers liability (D&O) insurance.

3. Recruit New Directors and Advisors

Building an effective Board of Directors is a major challenge for non-profits. They are often competing with other organizations to get community leaders, business executives, and people with financial resources to serve on their board. The absence of non-profit D&O liability insurance impedes the process of recruiting the people that the organization most desires to serve on its board.

4. Reduce Reputational Risk

One need only to open a newspaper to see the damage to an organization’s reputation by a D&O claim. The litigation against the Boy Scouts of America for failing to protect its members from predators is a particularly egregious example of the damage to an organization’s reputation. D&O insurance can provide money to compensate victims and reduce the reputational risk to the organization.

5. Secure the Giving and Grant Pipeline

It is simply a fact that people and foundations will be less likely to support an organization that has not protected itself against the financial consequences of D&O liability litigation. D&O insurance can provide defense against fraudulent claims and thus help secure the giving pipeline of the organization.