Nonprofit organizations may operate under the assumption that their missions and their board members’ good intentions protect them from litigation. Sometimes, this assumption is proven wrong with a lawsuit. To protect your leaders from financial exposure, consider directors and officers (D&O) liability insurance. This coverage allows board members to make decisions without fear that they’ll be personally responsible for any related litigation costs.
Protecting Key Individuals
D&O policies are designed to protect both your organization and its key individuals: directors, officers, employees and even volunteers and committee members. Normally, D&O insurance covers allegations of wrongful acts, errors, misleading statements, neglect or breaches of duty connected with a person’s performance of duties.
Such coverage typically would protect from allegations of mismanagement of funds or investments and employment issues such as harassment and discrimination. D&O insurance also usually covers claims of self-dealing, failure to provide services and failure to fulfill fiduciary duties.
If a legal complaint is filed against them, insured organizations contact their insurer to determine whether the matter is insurable and includes defense costs. Most policies reimburse the insured for reasonable defense costs, in addition to covering judgments against the insured.
Observing Policy Periods
D&O policyholders need to be aware of a few caveats. This type of insurance is claims-made, meaning that the insurer pays for claims filed during the policy period even if the alleged wrongful act occurred outside of the policy period. So D&O insurance provides no coverage for lawsuits filed after a policyholder cancels, even if the alleged act happened when the policy was in effect.
If you need to make a claim after your policy has been canceled or expired, you might still be covered if you have extended reporting period (ERP) coverage. It generally covers newly filed claims on actions that allegedly occurred during the regular policy period.
Considering Cost Constraints
Most nonprofits are cost-conscious and you may be wary of adding another insurance policy. To keep costs down, think seriously about the people and actions that should be covered and the amount of protection you need — and don’t need. If you already have general liability and workers’ compensation insurance, you probably don’t need coverage of bodily injury or property damage. And if you opt for higher deductibles, your policy will be less expensive.
Nonprofits in some states may not need D&O insurance because volunteer immunity statutes provide limited protection for negligence.