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Recently, during a presentation in front of a group of nonprofit board members, I learned that some in the audience were not aware of the risks they face as board members. This article explains why purchasing director and officer insurance is an essential element of every nonprofit organization’s risk management strategy.
Background – What are the responsibilities of the Board of Directors?
United States federal and state laws place the responsibility of ensuring the purpose, plans, and policies of nonprofit organizations on the board of directors. To govern properly, nonprofit boards must ensure that the organization’s mission (as written in the articles of incorporation and filed with the state) is achieved and that the organization’s plans and policies are appropriate and They are being followed.
What is D&O Insurance?
Nonprofitrisk.org defines director and officer insurance as “insurance that provides coverage against wrongful acts including actual or perceived errors, omissions, misleading statements, and breaches of duty on the part of the board of directors and other insured persons and entities.” Negligence or violations may be covered. Many D&O policies include employment practices liability coverage.”
Directors and officers insurance may cover the cost of legal counsel, out-of-court settlement, and payment of court-ordered compensation. Without this insurance coverage, the legal expenses to defend against a legal lawsuit can significantly damage your organization’s finances or even force your organization into bankruptcy.
Why is D&O Insurance needed?
All nonprofit organizations must maintain a current D&O insurance policy and no one should agree to serve on a nonprofit board unless they are sure that adequate insurance covers them for potential liabilities. Is.
If an employee, a member of the organization, a volunteer, a donor, or even someone from the general public thinks the nonprofit is not operating legally or in accordance with its founding principles, those directors You can sue the board. Defending against these charges may require expensive legal counsel, out-of-court settlement costs, or court-ordered damages. (Note: Legal counsel may be required to defend named board members in a legal suit, even if the allegations are not valid.)
Studies show that HR concerns are the most frequent cause of lawsuits against nonprofit boards. This includes allegations of illegal employment practices or negligence when hiring or firing employees, dealing with contractors, or managing volunteers. Other reasons for law suits include conflicts of interest, non-compliance with contracts, or using donations for other than their intended purpose.
Where can I get D&O insurance?
Most insurance companies offer D&O insurance. Your state nonprofit advocacy organization can advise you on insurance carriers that provide nonprofit D&O insurance in your state.
Generally, the cost of the policy is based on the nature and size of the nonprofit and whether legal and/or settlement costs are covered. Additionally, some policies include a “lifetime extension” that provides coverage to board members even after they leave the board or cancel the insurance policy.
Best Practices for D&O Insurance for Your Board
- The board treasurer is usually responsible for finding the appropriate insurance policy for an organization. The Treasurer should review the D&O policy annually to ensure that the coverage is adequate for your growing organization.
- When you are looking at D&O insurance, look for employment liability liability insurance. This insurance covers nonprofits for HR related complaints (sexual harassment, discrimination, etc.) that are becoming more prevalent over time.
- The nonprofit organization’s bylaws generally state that board members are indemnified (protected from potential legal lawsuits) as long as they are attending meetings, paying attention to board decisions, and being bound by decisions. Speaking up when you disagree. Here is an example clause that pertains to D&O insurance:
“Every director and officer shall be indemnified by the corporation against legal fees and liabilities, fines, penalties and claims (including amounts paid in settlement) imposed against him, unless he is held liable by reason of gross negligence or willful misconduct in the performance of his duty as a director or officer.”
Include discussion of your D&O insurance coverage on your board annual orientation session In which all the members of the board participate. This discussion should include who is insured, the amount of insurance coverage, the cost of the policy, and a caveat that board members are not covered if they are not appropriately involved in the decision making of the organization.
Don’t shy away from this issue.
Forward this article to your board of treasurer today and ask questions about your D&O insurance coverage. Ask that a presentation be made about your coverage at the next board meeting. Make sure you are insuring your organization against a liability that may exceed the asset value of your organization. If you are a board member, make sure you are compensated as a volunteer for your organization.
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