Chapter 2: Understanding Nonprofit Insurance Coverages
Part 2: How Nonprofit Liability Insurance Accounts for Your Most Pressing Risks
Now that we’ve covered a few basic insurance policies, let’s delve into the policies that are at the heart of your nonprofit’s business protection plan. Here, we’ll cover…
Why D&O Insurance Is Essential for Nonprofits
Directors and Officers (D&O) Insurance is one of the most important policies for your organization. That’s because, according to the Wyatt Nonprofit Organizational Directors’ and Officers’ Liability Survey , nonprofits spend…
- Between $35,000 and $100,000 on legal fees in a D&O lawsuit.
- A whopping $457,000 in settlements or judgments for damages in a D&O suit.
$35,000 - $100,000 = average cost of legal fees in a D&O lawsuit.
$457,000 = average judgment / settlement costs in a D&O lawsuit.
We’ve already mentioned a few mistakes a nonprofit’s board of directors could make. Here’s an expanded list of such mistakes, all of which could trigger a D & O lawsuit:
- Salary decisions made without proper arm’s-length decision-making processes.
- Salary payments or provision of benefits structured to unfairly benefit an individual.
- Conflict of interest with vendors who are related to the organization.
- Employee harassment.
- Improper termination (and other employment practices liabilities).
- Breach of duty.
- Issuance of misleading or inaccurate statements.
- Mismanagement of funds or other company assets.
Your board doesn’t even have to actually do any of these things to be sued. All it takes is an accusation to launch a potentially devastating lawsuit.
Like other insurance policies, nonprofit D&O Insurance protects organizations by paying for legal expenses and related costs. But this management liability insurance is particularly important for nonprofits because its board of directors functions differently than the board of a for-profit company:
- Non-profits have to maintain their tax-exempt status. The laws are tougher on nonprofit organizations, and small financial management errors could lead to huge costs in tax penalties, audits, or other problems. Simply having a board member vote on certain salary issues could cause your organization to lose its 501(c) status and trigger potential lawsuits.
- Nonprofit boards are more than just a governing body. Your board is an invaluable resource. A well-connected, influential board helps a nonprofit attract important donors, sponsors, and business partners.
When an NPO doesn’t have Directors and Officers Insurance, board members are responsible for funding lawsuits with their personal assets.
Without D&O Insurance, board members must pay for lawsuits with their personal finances.
Not only is that expensive and inconvenient for board members, but it also prevents you from retaining top talent. One of the most common reasons prospective board members refuse to join a nonprofit organization is because they don’t want to take a job that jeopardizes their personal finances.
Directors & Officers Insurance reassures board candidates that your organization can protect them (and their assets) from lawsuits. That way you can attract influential members to your board. (For more on this issue, read our blog post “Do I need D and O Insurance for My Nonprofit? ”)
Coverage for Professional Liabilities: Errors and Omissions Insurance for Nonprofits
So far we’ve discussed how insurance can protect your business from property damage, general liability lawsuits, workplace accidents, and management liability. Now let’s explore the insurance that steps in when you’re sued over professional mistakes.
You may be wondering what exactly a professional mistake is. Here are some examples:
- A nonprofit clinic treats a patient with medicine they are allergic to.
- A dog rescue facilitates an adoption but fails to inform the new owners that the pup has kennel cough, which spreads to the family’s Pomeranians.
- A vocational workshop fails to help an attendee get a job — or even an interview.
These are all professional liabilities — situations where a nonprofit allegedly makes oversights or fails to meet an accepted standard of care. In each of these examples, the third party that suffered a financial loss because of your services can sue your organization for damages.
The good news is that Errors and Omissions Insurance (aka Professional Liability Insurance) can help your NPO avoid an avalanche of debt by covering your legal defense costs and settlements or judgments. In the medical field, this type of coverage is called “malpractice” insurance, but it’s important for people in all industries.
You don’t have to actually make a mistake to be sued for professional liability, either. These claims are more a reflection of the third party’s attitude than the quality of your services. Luckily, E&O also covers “frivolous” or “meritless” claims. So even though you might be sued unfairly, your insurance can still protect you, sparing you from paying a couple thousand dollars in attorney’s fees over nothing.
E & O Insurance protects your NPO from both meritless and legitimate lawsuits.
What is a Claims-Made Policy?
Errors and Omissions and D&O Insurance are both “claims-made” policies. Claims-made policies mean your insurance benefits only kick in if two criteria are met:
- The event that triggered the lawsuit happened while your current policy was in force.
- The lawsuit was filed while the same coverage was active.
Lawsuits can happen years after the event that caused them. For example, your board could be sued over a financial planning mistake three years after it made the error. Sometimes, it takes a while for the fallout from mistakes to crop up.
Many E&O and D&O policies don’t cover events that happened before you purchased the policies. What makes things even trickier is that if you switch from one D&O provider to another, your new policy may not cover anything that happened under your old policy.
So what can you do to make sure your nonprofit receives its benefits when it needs them most? Here are your options:
- Get a policy and stick with it. Many nonprofits do precisely that. They purchase a policy in the early days of their business. As they grow, they increase their coverage limits, but stay with the same insurance company. This ensures they have no gaps in their coverage.
- Get a policy with Prior Acts Coverage. If you switch policies or purchase your first policy years after founding your nonprofit, you can purchase “Prior Acts Coverage.” This endorsement covers E&O and D&O lawsuits arising from past issues.
Claims-made policies can be pretty complex, so if you need some help making sense of it, feel free to talk to an insureon agent. You can also learn more about claims-made coverage in our blog post “What is Claims-Made Insurance Coverage? ”
Next: Chapter 3: Managing Your Nonprofit’s Risks