When you purchase an insurance policy, you’re generally looking out for yourself, whether you’re a business owner, a founder of a nonprofit, or an average person with assets to protect. You want a financial safety net in case you have to deal with an unexpected accident or lawsuit.
But when you purchase Directors and Officers Insurance, you’re primarily doing so to protect your organization’s board members and officers. And that’s why a board might demand that you carry D&O Insurance. After all…
- Board members can be found personally liable for actions they take as a director of the organization (related reading: “When Does a Nonprofit Need D&O Insurance?”).
- People are hesitant to serve on a board if it may jeopardize their financial wellbeing.
- D&O Insurance helps pay for legal defense fees, judgments, and settlements if board members are sued so those costs don’t come out of their own pockets.
As any successful group knows, it takes talented leaders to propel an organization forward. Skilled board members can make or break a nonprofit, but to attract those members to your cause, you need D&O Insurance. That way, you’re not asking candidates to risk their personal assets when they serve on your nonprofit’s board.
What Can a Board Member Be Liable For?
Incorporated nonprofit organizations enjoy limited liability for their members, staff, and officers. However, a board member still faces some exposures that could leave them open to a personal lawsuit over the work they do on behalf of the NPO.
For example, a member may be accused of…
- Misusing the organization’s funds. For example, someone might think an investment harmed the organization and could bring a lawsuit against the director who made the decision.
- Treating an employee improperly. This could include claims of harassment, discrimination, or wrongful termination.
- Being negligent in performing official duties. Someone may allege that the board member has not been exercising reasonable care in their decision-making.
These lawsuits can cost a tremendous amount of time and money even if the claims are ultimately frivolous. D&O Insurance provides funds for the director’s legal defense and other subsequent costs.
Think of it this way: when a person joins the board of directors for a nonprofit, they believe in the cause and want to help. The last thing a board member expects is to face a lawsuit. Even charitable immunity can’t protect against lawsuits, according to Nonprofitrisk.org . When you take these points into consideration, it’s easy to see why a board might demand D&O coverage.
Additional Protection for Board Members
Another way to protect board members is to include an indemnification clause in your articles of association that holds directors and officers harmless for certain actions. This provides an internal reference for how your organization protects board members. It might attract potential directors to your cause, too. However, candidates may still request that you carry D&O coverage before signing on.
For more information about the policy, check out "Do I Need D&O Insurance for My Nonprofit? "