I have been very surprised lately to learn how many nonprofits do not carry Directors and Officers Insurance. So many in fact, that I decided to take a deeper dive into the issue.
Directors and Officers Insurance (D&O if you want the industry lingo) was created to safeguard individual board members of for-profit organizations for their financial and management decisions. Stockholders learned they could sometimes successfully sue these board members for decisions that led to their stock shares losing value, and corporate officers needed to be protected.
But disgruntled vendors, clients, and other stakeholders can also to sue an organization for other reasons. Failure to comply with government regulations, creditor claims, reporting errors, and breaches of fiduciary duty are common allegations. Remember, just about anyone can be sued at any time for about anything. The suit does not have to be valid and could be quickly dismissed. But the legal fees could mount up in the meantime. D&O covers that.
Of course, D&O won’t cover anything illegal. Most policies specifically exclude fraud, criminal activities, or lawsuits between members of the organization itself. And, if a board member sues the nonprofit, then D&O generally won’t cover that either.
The cost of D&O insurance varies widely and is based on the number of board members and the type of organization insured. Since nonprofits are not frequently sued, D&O is generally less expensive than similar for-profit board coverage. And, long-standing, financially stable organizations usually pay less as well. D&O premiums can start at about $500/year but could be $5,000/year or more depending on the size and nature of the nonprofit. Bundling this coverage with your general liability policy could lead to savings.
When considering D&O insurance, you may wish to also consider the corporate status of your nonprofit. Incorporated nonprofits offer more protection to their board members than nonincorporated nonprofits. It may be cost effective to incorporate to achieve lower D&O premiums.
D&O coverage is not required by law, but many savvy people will refuse to serve on your board if the policy is not in place. Board members are arguably some of your best supporters, volunteers, donors, and collaborators. Adding D&O coverage protects these human resource “assets” and can help you attract new ones.
Of course, as with all advice you read on the internet, always check with your organization’s advisors before making financial or insurance decisions.
Special thanks to my friends at Shafer Insurance Agency, Knoxville, TN, for their counsel on this article.
