Directors and officers (D&O) insurance provides crucial protection for nonprofit board members and officers against legal costs arising from lawsuits alleging financial loss due to their decisions. This coverage is essential for attracting and retaining qualified individuals to guide your organization. Determining the appropriate amount of D&O insurance is a critical decision for any nonprofit. This guide explores the purpose of D&O insurance, the factors influencing coverage needs, and how to determine the right level of protection for your organization.
Understanding the Purpose of Directors and Officers (D&O) Insurance
D&O insurance, often called management liability insurance, covers lawsuits related to decisions made by a nonprofit’s board of directors or appointed officers. It provides financial protection against a range of allegations.
Here are some examples of what D&O insurance typically covers:
- Accusations of Mismanaged Funds: Board members may face lawsuits for alleged poor investment decisions or misuse of nonprofit funds. Even if the lawsuit is without merit, legal fees can quickly deplete the organization’s resources. D&O insurance helps cover these costs.
- Failure to Meet Regulatory Standards: If a nonprofit fails to comply with regulatory standards, the board of directors may be held responsible. D&O insurance can cover the legal expenses associated with defending against such claims. This includes costs related to compliance failures with industry regulations or standards.
- Failure to Perform Official Duties: Board members can be sued for failing to fulfill their fiduciary duties or legal requirements. A D&O policy helps cover the costs of hiring an attorney and other related expenses in such cases.
How Much D&O Insurance Is Actually Needed for Nonprofits?
When an individual believes a board of directors took improper action, they may file a claim. The most common type of lawsuit alleges that the board of directors permitted the improper termination of a worker. D&O policies typically cover this type of claim, especially since D&O claims are often employment-related, including issues like wrongful termination, discrimination, or harassment.
If a nonprofit has no employees, the risk of a claim against a board member is relatively low, resulting in a lower premium for D&O coverage. However, purchasing coverage, even in this scenario, provides board members with peace of mind.
While D&O insurance typically protects individual board members, employees, volunteers, and the organization itself, policies vary. Confirm with your broker that the organization and individuals are fully covered under the specific policy.
The amount of D&O insurance needed varies based on the organization and its specific needs. There’s no one-size-fits-all answer, but several factors influence the appropriate coverage level:
- Number of Employees: The more employees a nonprofit has, the higher the risk of employment-related claims, thus increasing the need for higher coverage limits.
- Budget Size and Assets: Larger budgets and more assets can make a nonprofit a more attractive target for lawsuits.
- Activities and Programs: Nonprofits engaged in higher-risk activities may need higher coverage limits.
- State Regulations: Some states have specific requirements or guidelines for nonprofit D&O insurance.
What Is the Cost of D&O Insurance for a Nonprofit?
For a nonprofit without employees, you can often purchase $1 million in D&O limits for approximately $600 per year. Nonprofits with employees might pay around $1,200 for those with just a few employees, scaling up to $4,000-$5,000 for up to 50 employees.
The actual cost of D&O coverage varies based on the insurer, the breadth of coverage, past claims history, and the quality of the organization’s employment practices. D&O coverage protects the legal expenses of defending the nonprofit and any settlements that may arise.
It’s important to note that D&O insurance does not cover board members’ responsibility for retirement payments and payroll taxes withheld from employee paychecks but not submitted to the appropriate institutions.
D&O Insurance Helps Attract Quality Talent to Your Nonprofit
Securing D&O insurance signals that your directors and officers are fully protected. This attracts top talent who may decline a position if they believe their personal assets are at risk.
A business with an advisory committee or board of directors can benefit from a D&O insurance policy. Consulting with insurance professionals is essential to determine the best course of action for your specific needs.
Now You Know the Importance and Costs Related to Directors and Officers Insurance
Running a nonprofit organization requires significant time and effort. However, the insurance needs of the nonprofit may be overlooked.
One type of insurance that should not be overlooked is directors’ and officers’ insurance. Contact a qualified insurance professional to learn more about D&O insurance coverage and other insurance needs for your nonprofit organization. They can help you find the right coverage at a price that fits your organization’s budget.
