Does a Nonprofit Organization Need Directors and Officers (D&O) Coverage?Posted on Mar 25, 2022
Nonprofits often face intense scrutiny about how they use their funds and their method of operations. Where claims are made against directors of a nonprofit, the organization, directors, officers, and trustees can find they are neck-deep in expensive legal procedures, resulting in huge fees, penalties, and litigation costs.
Even the best intentions can result in a claim or lawsuit. Nonprofit directors & officers (D&O) can help defend against these risks.
What are Nonprofit Organizations?
Nonprofit organizations are primarily created to offer community services that improve the well-being of people. The people holding managerial positions in the organization are often passionate about its objectives and work voluntarily.
The managers of a nonprofit are responsible for utilizing the funds received by the organization to pursue its objectives. Some of the duties of directors are:
- Making decisions on handling funds and budget.
- Managing finances and budget.
- Taking actions on ways to promote the nonprofit’s objectives.
- Handling HR and taking charge of their training and development.
- Participating in fundraising programs by raising awareness of the entity’s objectives.
They receive voluntary contributions and donations to provide the services, which opens them up to certain risks.
What is Directors and Officers (D&O) Coverage?
Director and officers (D&O) coverage is a management liability insurance product that protects a nonprofit organization from expenses arising due to claims made regarding the actions of its directors and officers.
The insurance covers the risks arising from the management’s actions towards the nonprofit. Typically, the claims covered under (D&O) insurance are those made by employees, creditors, government officials, and the public in general.
Reasons a Nonprofit Organization Needs (D&O) Coverage
Holding such vital positions often exposes the directors and the management to risks that may arise from claimed mismanagement of the funds, inappropriate leadership, and failure to achieve the nonprofit’s objective.
To protect the nonprofit and its directors from the risks, organizations resort to directors and officers (D&O) insurance.
Reasons why a nonprofit needs directors and officers insurance are as follows:
- Protecting the nonprofit organization. Even when the directors and managers work in good faith towards promoting the nonprofit’s objectives, claims may arise. Getting insurance coverage can help protect nonprofit organizations from unnecessary lawsuits.
- Securing management’s liability. Nonprofit organizations often recruit directors on a voluntary basis. They play a significant role in managing the nonprofit and getting funds to promote the organization’s objectives. While D&O insurance cannot prevent claims, it can protect the management from exorbitant litigation expenses.
- Preserving the nonprofit’s reputation. Often, the claims made against the entity are frivolous, which might dent the nonprofit’s reputation. Having D&O insurance can handle the costs related to such unnecessary lawsuits so that the organization can focus on its objectives.
- Helping attract and retain talents. Having D&O insurance can protect the rights of the managers involved in the nonprofit. It provides a safe ground for attracting the brightest minds in the industry.
- Securing funding. D&O insurance provides nonprofit organizations a defense against fraudulent claims and helps attract funding from established people and organizations.
What Coverage Does D&O Insurance Provide for NonProfits?
Directors and officers insurance typically protects the nonprofit from the following claims that may arise during the organization’s management.
- Mismanagement of organizational funds.
- Employment practices including harassment, wrongful discrimination against employees, and termination of their services.
- Not following the organization’s bylaws.
- Misusing of the entity’s funds.
- Failure to maintain financial records as per guidelines.
- Malpractices against the organization’s creditors and beneficiaries.
- Litigation costs and claims arising from legal actions taken by third parties.
- Not maintaining the nonprofit’s tax-exemption status.
Although having D&O insurance does not prevent claims, it protects the nonprofit from litigation costs. It also covers the risks to the director’s personal assets that may result from the lawsuit.
For example, where a claimant accuses the nonprofit of mishandling funds, the D&O insurance will cover the litigation cost and other incidental charges up to the insurance policy’s limit. If the claimant wins the case, the insurance will reimburse the expenses incurred by the management up to the policy amount, provided the act was not intentional.
Cost of D&O Insurance in a NonProfit Organization
The D&O insurance coverage is comparatively inexpensive for nonprofit organizations. The costs can depend on the following :
- The size of the organization. The smaller the size, the lower the premium would be. A small private nonprofit will have a considerably lower premium than a more significant entity.
- The number of employees. As D&O claims are generally employment-related, the policy cost will vary with the number of employees. Where an organization has fewer employees, the risk of claims made due to employment discrimination and other malpractices becomes very low.
- The nature of the work. Where the nonprofit manages work that involves a higher risk, it can attract more claims.
- The organization structure. A nonprofit with clearly defined HR policies with specific guidelines regarding employment and termination of its employees will have fewer claims.
Lawsuits against nonprofit organizations can cause unnecessary financial burdens and damage their reputation. D&O insurance covers losses arising from claims against management and helps the nonprofit attain its objectives.
Choose Otterstedt Insurance Agency to Protect Your Directors and Officers
Call Otterstedt Insurance Agency today on (201) 227-1800, with all your questions about it, and get a free directors and officers liability insurance rate quote.