Q: Which layers of Directors and Officers Insurance does a small nonprofit need?
A: It depends on the risks your nonprofit may face and its legal structure. A Directors and Officers Insurance policy can offer the following three "layers" of coverage that have varying benefits…
- Side A: This offers direct coverage for directors, officers, or other employees by compensating these individuals for defense costs and legal fees in the event of a covered lawsuit.
- Side B: This offers indirect coverage for directors and officers by compensating the organization that pays defense costs on behalf of its board members.
- Side C: This offers coverage for the nonprofit organization itself in the event that it’s named in a lawsuit. This may address lawsuits not covered by other insurance policies.
Having only Side A coverage may help protect your board members, but the initial cost of legal fees falls squarely on the individual. Because these costs can quickly snowball into huge sums, some board members may not find Side A adequate enough for their own financial safety. Having Side B as well can help the organization front the costs for the board members. Consider Side C coverage if your organization as a whole might be vulnerable to certain lawsuits.
For context, here is what other nonprofits typically carry, according to a survey by Towers Watson …
- 6 percent carry Side A only.
- 17 percent carry Sides A and B only.
- 44 percent carry Sides A, B, and C.
The other 32 percent weren’t sure what their D&O coverage was. That can be bad news when it comes time to defend against a lawsuit. To better understand your own coverage and what you may want to consider purchasing, talk with an agent who works with small nonprofits. They can determine which types of coverage can address your specific risks.