Blog: The Importance of Directors and Officers Liability Insurance for Nonprofits

By January 15, 2019 February 5th, 2019 Blog

Important for all, but especially nonprofits

This article is from Sterling’s Fall 2018 issue of its Risk & Business Magazine. Want a copy? Email jgiffels@sterlingagency.com. Please enjoy and share.

Directors and Officers liability insurance (D&O) is typically thought of when considering corporations and other large companies. After all, they are the ones out there dealing with the public, making huge financial decisions that could impact stakeholders, right? That’s completely true. Aside from them, however, the group that really needs protection against D&O liability risks are nonprofit organizations. Unfortunately, there is a huge misconception out there that directors, trustees, and officers of nonprofit organizations don’t have a personal liability exposure due to their positions.

Looking out for officers and staff

The fact is, nonprofit officers often have a job that proves to be even more demanding than their counterparts in the business world. That is simply because these organizations are often less familiar to the individuals that are put in those positions and the nonprofits are often being run under less than ideal conditions. Those facts, however, are irrelevant when one considers the legal standards of conduct for these positions. Those standards are just as high—sometimes higher—than the standards that would be applicable to for-profit companies. To make matters worse, the damages that may be recoverable from nonprofit officers who are found liable, even if they work for a small nonprofit, often exceeds their personal net worth.

There are two types of nonprofit organizations, and each type faces its own unique challenges:

  • Mutual Benefit – Formed to serve its members. This would include social organizations, credit unions, athletic clubs, co-ops, and things like trade organizations.
  • Public Benefit – Formed to serve the public at large and usually defined by some sort of criteria. Could include churches, hospitals, civic groups, libraries, etc.

Having the right protections in-place

When it comes right down to it, the potential for lawsuits boils down to decisions being made by nonprofit management. Often, these types of suits are going to have something to do with the supervision of employees, how assets are being used by the company, the way the charter of the nonprofit is being interpreted, or personnel decisions (such as hiring and firing). Basically, anything done by directors or officers in a decision-making capacity could potentially lead to a lawsuit, and it doesn’t always matter whether the claims have a legal basis or not because they will have to be defended either way.

Another important thing to understand is that general liability insurance and umbrella coverage does not usually cover D&O liabilities. Losses due to D&O claims often stem from things like discrimination, wrongful termination, and the like, all of which are usually left out of general liability policies.

No two nonprofit organizations are exactly alike, and neither are the policies that they need. Having the right protections in place is a key element in attracting and retaining talent for your nonprofit. Do you have the right policies in place to keep things running smoothly up top?

Sterling can help. Contact us or learn more about this specialty industry of Sterling’s.