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What is fiduciary liability insurance?

Q: What is Fiduciary Liability Insurance?

A: Fiduciary Liability Insurance is a policy that can offer coverage for claims resulting from a breach in fiduciary duty.

But let’s break that down: what’s fiduciary duty and how do you breach it?

Defining Fiduciary Duty

Fiduciary duty is a financial responsibility that one party has to another. Specifically, when one person or a group of people oversees how money is used, invested, or dispensed for the benefit of a group or its goals, that person or group has a fiduciary duty to its members or beneficiaries.

In other words, the party in charge of using an organization’s money is responsible to the whole organization for using it wisely. In the case of a nonprofit organization, this party is usually the board of directors. Fiduciary duties (or liabilities) that the board may assume include…

  • Handling salaries, retirement, healthcare, and other finances for employees.
  • Maintaining a tax-exempt status with the IRS and (or paying applicable taxes, if necessary).

Therefore, any breach of these duties (or allegation of a breach) can lead to a claim by employees, organization members, government agencies, or other parties that have a stake in the board’s performance. Fiduciary Liability Insurance may cover these claims.

Fiduciary Liability Insurance Coverage

Fiduciary Liability Insurance is a kind of Errors and Omissions Insurance. It may offer protection for the nonprofit and board in case their actions cause another party financial harm.

Keep in mind that when a lawsuit claims there was a breach in fiduciary duty, a nonprofit’s board members may be personally liable. This is why nonprofits often purchase Directors and Officers Insurance, which can include Fiduciary Liability coverage and offer protection for board members and the organization as a whole. The coverage may help spare your board members’ personal assets by paying for legal defense costs, judgments, and settlements.

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