When serving on the board of a nonprofit organization, you may be exposed to a variety of legal risks. And because you are legally responsible for the day-to-day decision-making of your organization, your personal assets could be at stake in a claim. Directors and officers (D&O) insurance protects you by helping to pay defense costs, damages, settlements and judgments of any covered claims.
Why You Need Directors and Offices Coverage
A claim brought against your organization could be financially devastating, putting your personal assets at risk. Some of the management liability claims that nonprofit organizations most often face include:
- Wrongful termination
- Civil rights violations
- Conflict of interest
- Violation of a statute
- Fraudulent conduct
- Violation of the article/bylaws
- Breach of contract
- Breach of fiduciary duty
- Financial mismanagement/bankruptcy
- Personal financial gain
- Mistakes/judgment errors
What Directors & Officers Insurance Does
The main benefit of directors & officers insurance is that it pays to cover the costs to defend against management liability claims. It does this in one of two ways:
- Reimburses directors for legal costs that the nonprofit cannot or will not pay
- Reimburses the organization for legal costs it incurs in indemnifying directors
Questions for Your Nonprofit
When accepting a board position at a nonprofit, consider asking the organization these questions about its directors & officers insurance:
- Is company able to rescind coverage?
- Is there severability of the insured regarding the application and exclusions?
- Does your policy allow choice of counsel?
- Is definition of insured including all independent contract workers?
- Does policy provide for workplace violence?
- Does policy provide for wage and hour defense?
- Does policy provide for claims arising out of bodily injury or property damage?
Scenarios That Put Board Members at Risk
While it's impossible to predict what exposures you may face as a director or officer, here are a few scenarios that often happen:
- A major benefactor of a nonprofit organization disagrees with its board members and sues them individually for financial mismanagement
- Someone in the community sues the board members because of the direction the nonprofit decides to take with an activity or program