Do Nonprofits need D&O Coverage?
Although many nonprofits are limited in the amount of resources they can allocate toward purchasing insurance, the Management Liability suite of policies (Directors and Officers, Employment Practices Liability, and Fiduciary Liability) should be considered an essential part of any basic insurance program. For the purposes of this post, we will be focusing on Directors and Officers Liability.
Time and time again we engage with nonprofits and find upon review of their insurance program that they do not carry Directors and Officers coverage. As discussions progress, we find that this complicated and often misunderstood line of coverage is typically only associated with large, for-profit organizations that have to answer to shareholders. While I can understand how it may appear that way on its face, this coverage provides necessary protection to nonprofits for both the organization and the D’s and O’s personally for any liability imposed on them from numerous operational exposures.
So, what does Directors and Officers Liability do? This coverage protects Directors, Officers and other individuals in equivalent positions from claims brought against them directly due to a wrongful act. In the standard marketplace, typical definitions of wrongful act include: any act, error, omission, misstatement, breach of duty, and even misleading statement in some cases. Due primarily to a general sub-par effort in the broker community to accurately explain the need, public and mutual benefit nonprofit executives are often left wondering why this coverage is meaningful for them.
Let’s try a little game of true or false:
- True or False – Directors, Officers and Board members can be held personally liable for wrongful acts (refer to previous paragraph) that lead to, or are alleged to have led to bankruptcy.
- True or False – Directors, Officers and Board members can be held personally liable for a misleading statement to donors about the financial status of the organization.
- True or False – Directors, Officers and Board members can be held personally liable for a misleading statement to third party seeking to acquire the organization
- True or False – Your organization is sued for breach of contract. It is found that your CFO constructed a poorly worded contract which resulted in multiple interpretations of intent. There is coverage for settlement and defense costs through a policy other than D&O.
MAYBE– Hey, I’m an insurance guy, of course I needed to throw in a “maybe”. Truth is, depending on the type of contractual liability, this may or may not be covered by the Commercial General Liability policy. I will say however that the CGL is written to exclude breach of contract type claims, except under certain circumstances allowed by the ISO CGL form.
As you can see, it’s not just suits from disgruntled shareholders looking to recoup losses for devalued stock, there are endless scenarios that apply to nonprofits and these should be discussed with your insurance broker partner… before a claim comes in.
Stay tuned for related blog posts on Employment Practices Liability and Fiduciary Liability.