It’s one thing to have coverage in the form of Directors and Officers Insurance, but quite another to know why you need that coverage in the first place. After all, knowing who’s likely or willing to bring a lawsuit against your board can help you avoid a costly legal battle altogether if you play your cards right.
As Sun Tzu famously advises, knowing your enemy and knowing yourself leads to victory in a hundred battles. And though it might not be quite appropriate to think of potential litigators as enemies most of the time, the general suggestion holds true, right?
In any case, let’s get to it. Who can bring a D&O claim against your nonprofit or its board members?
Potential Plaintiffs: Employees, and Creditors, and Clients, Oh My!
Generally, anyone who has a stake in what your directors and officers do can file a lawsuit against them. But what does that mean?
If your board is responsible for hiring and firing certain employees, then those employees naturally have a stake in how those duties are carried out. For example, if the board makes discriminatory hiring decisions, potential employees may be negatively affected. Those candidates may decide to sue the directors.
If your board is responsible for accurately representing the financials of the organization to creditors, those creditors could be harmed if the board gives inaccurate information. If the board is responsible for decisions involving clients or beneficiaries of their services, then those clients have a stake, too. (For this reason, you might want to see "Why Your Board Might Demand You Carry D&O Insurance.")
In short, any one of the following groups can file a lawsuit against your board:
- Former employees.
- Donors, creditors, and lenders.
- Government agencies.
- Beneficiaries or clients.
- Other third parties.
It’s a big list. Of course, the likelihood of one of these parties filing claim depends on what your nonprofit does. You may not ever use volunteers, for instance, or the IRS might be the only governmental agency you ever interact with (and your taxes are filed perfectly every time).
To learn more about why your board might be vulnerable to lawsuits, check out "When Does a Nonprofit Need D&O Insurance?"
Reasons for D&O Lawsuits
Given such a wide range of potential litigators, it can be hard to know what kind of lawsuits you might face. Generally, a person or entity may threaten to file a D&O lawsuit when they feel that your board of directors was negligent in their duties or otherwise caused them financial harm.
- A former employee may allege that he was unfairly discriminated against and fired.
- A donor may sue, claiming the board misrepresented the financial status of the organization.
- A government agency may allege that the nonprofit misused grant funding.
- A beneficiary of your organization may claim they were discriminated against and denied service.
- A member or employee may allege harassment or retaliation by a board member.
When it comes to thinking of the protection D&O Insurance offers, it may be useful to think of it like Errors and Omissions Insurance for your board members. Because your board is responsible to more than just customers or clients, D&O coverage can extend to lawsuits brought by more than just customers or clients.
As always, talk to your insurance agent if you have any questions about your coverage. Know thyself, know thy enemy, and know thy insurance.