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Nonprofit organizations provide a valuable service. Most work to close gaps in areas of need that are either difficult or impossible to achieve by federal and local governments. The areas these non-profits work in includes providing financial aid to low-income students, housing development, charitable giving for impoverished families, feeding, and clothing the poor and many other valuable, needs-based services.
It’s important to understand that even a nonprofit organization is not without risk. Nonprofit organizations typically receive funding through donations and maintain a tax-exempt status; all are held under extra scrutiny regarding how they spend money as well as how they manage their employees.
Directors and Officers Insurance, or D&O, is a policy designed for companies that are managed by a directorial board. This insurance provides liability coverage for those company's managers in cases where others, be it shareholders, contributors, competitors or federal regulators, make claims against board members and other company leaders for their actions or decisions. A D&O Insurance policy is both a common and necessary type of insurance for nonprofits, given that all nonprofits maintain a board of directors of varying sizes and have top-level executives who run the business.
By purchasing a D&O policy, nonprofits can protect themselves and their directors from having to pay the expensive legal fees that come with defending claims. The true benefit of this type of liability insurance is that it operates similarly to an Errors and Omissions Insurance policy, but is designed specifically for managers, directors, and officers of a company.
An Insurance Information Institute survey demonstrated that, of the 31% of companies having a D&O claim in the previous five years, the majority (58%) were non-profits.
A nonprofit executive serves a large number of functions within the company. Chief among these is implementing company policies as well as having to deal directly with major claims against the company. Other executive duties can include:
Executives carry a significant liability risk due to their leadership position within the organization because they are usually the primary person implementing and setting policies and procedures.
Although a single employee may be responsible for making errors that reflect poorly on the organization, it is the executive who takes the blame when claims are made against the organization.
Directors and Officers Insurance will not prevent claims from happening. What it can do is help mitigate the high costs associated with defending against these claims.
For most nonprofits whose executives, managers and other officers must defend against claims; the largest cost burden is often the legal defense. A D&O Insurance policy may pay to reimburse either the directors and officers involved or the company itself. This policy may also reimburse the company or the directors and officers should a claim result in a loss.
For example, if a nonprofit's top executive is accused of mishandling donated funds, this policy will provide the full cost of the defense, up to the policy limit. If the judge rules in favor of the claimant, this policy will help to reimburse the executive or the company up to the remaining policy limit, as long as the incident was not deemed to be intentional.
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A D&O policy is relatively inexpensive for most nonprofit organizations. Certain risk factors do exist which may influence the final cost. Nevertheless, premiums tend to be less expensive than many other types of insurance.
The total cost for D&O is often determined by your company’s size. For example, small, private nonprofit organizations are typically considered low-risk. Many pay as little as $500 a year for each million dollars in premium coverage, according to the Insurance Information Institute (III). The total cost of the premiums will be determined by how many employees you have covered in your organization and how risky it is to insure your business.
Before purchasing a policy, make sure you understand fully understands the liability risks for directors and officers. For example, what are the chances that your nonprofit will be able to afford a legal defense?. According to the American nonprofit magazine, Blue Avocado, average D&O claims can cost around $35,000 to settle, while one out of every ten will exceed $100,000 before a resolution is reached. Additionally, if you look at all privately held companies, not just non-profits, the average cost of a Directors and Officers lawsuit is nearly $700,000, a number that includes judgements, settlements, fines and legal fees, according to Chubb.
The coverage limit you purchase will also impact how much your nonprofit organization pays for insurance. On a separate note, how your organization handles risk mitigation will influence the final cost. For example, if your nonprofit organization has clearly written policies related to hiring and firing practices, you will be seen as less risky. This will result in a lower risk factor and therefore lower premiums.
