Do Nonprofits Need Directors and Officers Insurance?
TLTR: The non-profit world is not all charity and acts of service. This article explains the risks in running non-profits and how directors and officers insurance for non-profits plays an important role in evading these risks.
Have you ever wondered what it takes to run a nonprofit organization? Nonprofits are huge sources of change for the better and people who believe in the power of change run it. The general public holds the directors and officers of non-profits to high ethical standards. That’s why they need to reflect the moral ethics of the communities they run.
However, non-profits cannot run on good intentions alone. While they do exist for the good of their communities, the internal and external operations of a non-profit can often delve into darker territories, even if the directors and officers hold the best intentions. For this reason, they need good directors and offices insurance for nonprofits plan to back them financially for the various risks involved.
In this blog
- What Exactly Are Nonprofits?
- Who are the Directors and Officers for Non-Profits?
- The Most Important Policies for Directors and Officers Insurance for Nonprofits
- More Policies for Directors and Officers Insurance for Nonprofits
- Some Nonprofit Organizations Claim Scenarios
- What Are the Costs of Directors and Officers Insurance for Nonprofits?
- In Conclusion
- Frequently Asked Questions
What Exactly Are Nonprofits?
A nonprofit is a tax-exempt organization that exists to provide social services. They often run on donations or are self-funded, and the funds are intended to be used to further a specific social cause.
Not all charitable organizations are nonprofits. According to The National Council of Non-Profits, there is a large misconception that all tax-exempt organizations are nonprofits. There are about three dozen types of tax-exempt organizations created by congress in different tax code sections. Only organizations that come under these sections are nonprofits. Some examples of this include:
- Section 501(c)(4) refers to social welfare organizations and volunteer organizations.
- The section 501(k) refers to childcare organizations that do not run-on a profit-based system.
- Section 501(c)(3) refers to public charities or private foundations.
- Section 501(c)(5) refers to labor unions.
Hospitals, universities, and religious organizations are also nonprofits. However, not every tax-exempt charitable organization is a nonprofit. UN bodies, for example, are not considered nonprofits despite being tax-exempt, as they are multinational organizations on a large-scale government donor system. They are not-for-profit but not necessarily nonprofit.
Who are the Directors and Officers for Non-Profits?
A board of directors and officers often decides the actions taken by nonprofits. The larger the organization, the higher the amount of risk with each decision made. The board can consist of a small group of founders, or it can be hired directors and officers, or a mix. Regardless, these people are liable whenever things go wrong.
For example, when Red Cross volunteers cause reputational risk to the organization, they may lose their positions. Still, the high costs of withdrawn donations, PR hindrances, and lawsuits would all lie on the directors and officers.
The Most Important Policies for Directors and Officers Insurance for Nonprofits
There are multiple areas to cover in D&O insurance, but the most important policies are as follows:
Employment Practices Liability
This is arguably the most critical area of coverage. Employment practices liability is claimed the most out of all types of D&O insurance coverages. According to Non Profit Quarterly, 94 % of the claims under a D&O policy come from employment practices allegations. Also, this coverage tends to attract more talent for your organization. Employees are more likely to trust an organization that can present this type of insurance along with thorough employment handbooks and regulations. The most common types of employment practices claims are the following:
- Sexual harassment
- Racial and gender discrimination
- Retaliation, including against whistleblowers
- Failure to accommodate as per Americans with Disabilities Act
- Improper employee classification
Governance claims are few and far between. However, it is still an important coverage, particularly for large-scale operations. This covers the types of allegations made against the board of directors and officers of nonprofits for which a basic D&O insurance policy couldn’t cover. More specifically, it would be required in various conditions of alleged organizational malpractice or internal or external legal mishaps, accidental or otherwise.
Governance claims include the following:
- Breach of contract
- Improper board elections.
This coverage is similar to governance liability but pertains more to misuse of funds or financial data. This is important coverage to keep in place as fiduciary allegations are serious and could jeopardize the longevity of your nonprofit.
Fiduciary claims include the following:
- Attorney general investigations
- Improper fundraising allegations
- Improper reporting of revenue
- Mishandling of donations
- Failure to report payroll taxes
More Policies for Directors and Officers Insurance for Nonprofits
Along with employment practice liabilities, fiduciary liabilities, and government liabilities, there are many more basic areas of coverage that are extremely useful in other scenarios. These are not less important in the sense that a thriving non-profit organization would still require these, though the risk factor is a lot lower.
General Liability Insurance
General Liability Insurance covers all of the expenses related to physical injury of clients while on your property and damage to your property. It also is useful for covering lawsuits, particularly for libel and slander.
Business Owners Policy
Business Owners Policy is a type of business insurance that combines the coverages of general liability insurance with commercial property insurance. This is a smart buy, as you can find it at a relatively lower rate than if you were to purchase each policy separately.
Professional Liability Insurance
Professional Liability Insurance can partially cover legal expenses if a client sues your nonprofit for either negligent or unsatisfactory work. It is important to have this coverage because even the most competent non-profit organizations can have deals that backfire, resulting in resentful clients.
Workers Compensation Insurance
Most states require businesses to carry workers compensation insurance. It covers employees for medical costs for work-related injuries and illnesses and compensates for the pay that they may miss when unable to work. Even if your state doesn’t legally require your non-profit to have this coverage, it is ethical to do so and will attract better talent.
Some Nonprofit Organizations Claim Scenarios
Though nonprofits exist entirely to benefit and serve communities, you may find that running a large operation to do any task can come with certain hindrances. Non-profits exist through donations and funding rather than the selling of a product. For this reason, securing finances for a non-profit can be a daunting task with many obstacles. The nonprofit world is not as squeaky clean as it may seem.
According to an extensive study done by Swiss Re, often donors, members, creditors, governmental bodies, and employees make claims against directors and officers. Usually, internal disagreements, staff negligence, and client dissatisfaction cause these claims. Occasionally, corruption within an organization can rear its ugly head.
In the following cases, D&O insurance for nonprofits is vital:
Misuse of Funds
It’s not uncommon for large charitable foundations to be sued for misuse of funds. When large sums of money start coming in, trustees may be excessively compensated. Even with fair compensation, when large amounts of money meets with insufficient time and resources to support the intended purpose, it becomes effortless to claim misuse of funds.
For example, a millionaire donates a big lump of money to a non-profit hospital to research a particular cause. If the hospital cannot carry out the study for any reason, be it an unethical funneling of funds to the trustees or just a lack of time or an operational level inconvenience, a donor can easily sue the D&O for misuse of funds. These lawsuits can easily lead to the eventual bankruptcy of a hospital.
Creditors can easily allege inaccuracies in financial data, claiming that their companies relied upon a certain number when they extended credit that was not met by a specific allotted timeframe. This timeframe is often created and can be changed by the creditor outside the control of the non-profit. The non-profit board can be sued by creditor companies alleging their funds were squandered.
Customer lawsuits, on the other hand, are alleged when there are disputes with the products or services rendered are unsatisfactory. While these types of lawsuits are more challenging to evaluate, they can also lead to horrendous PR scandals, withdrawals of donations, or even eventual bankruptcy.
For example, if family A receives sporting goods from a certain children’s fund, but the quality of the product they receive may be less than what is received by family B, family A holds grounds to contest discrimination. Even if the claims do not hold court, fighting the claims will be an expensive operation without insurance. The media coverage of this event can lead to massive scandals and potentially end the non-profit organization entirely.
Competitor lawsuits often stem from allegations of anti-trust or unfair competition. A competitor can misrepresent the intentions of your non-profit organization in court to create a monopoly on donors and poach internal talent. Other types of lawsuits made by competitors include infringement of a competitor’s trademarks, like logos, uniforms, or themes.
Lawsuits Under the Corrupt Practices Act
These issues tend to be covered by employment practices liability. To reiterate, employment practices liability is the most important type of coverage and the most commonly claimed one for this exact reason. ̤Discrimination lawsuits for acts of discrimination based on age, disability, gender, race, religion, and other categories are extremely common in the nonprofit world.
Wrongful termination is one example of this. Employees can allege their firing or layoff was illegal and violated anti-discrimination laws, employment agreements, or labor laws. Often, for larger non-profits, work is departmentalized, and a malevolent manager or a bitter employee can sabotage the workplace’s reputation as a whole. Creating a transparent system of reporting and making sure your employees follow that system is crucial for nonprofits.
Sexual harassment is another huge example. While it is important to believe victims under all circumstances, because of the velocity of sexual harassment cases in all industries, D&O insurance is important to protect victims as well to the distance non-profit’s reputation from the perpetrator. Also, maintaining stricter guidelines on employee dating and fraternization might be important, depending on the nature of your nonprofit.
What Are the Costs of Directors and Officers Insurance for Nonprofits?
According to Blue Avocado, organizations with no employees can purchase $1 million in D&O limits for around $600 per year. Organizations with employees can expect to pay anywhere from about $1,200 for those with just a few employees to approximately $4,000 to $5,000 for 50 employees.
According to Insureon, among the non-profit organizations that buy insurance from their company, 24% pay less than $400 per year and 41% pay between $400 and $600 per company.
Granted, larger-scale non-profits will require higher amounts of insurance. Ultimately, it depends on the size and the goals of the non-profit organization.
Overall, the world holds non-profit organizations to a higher moral standard than for-profit companies. They exist to benefit the community and to bring positive change. However, running a non-profit with good intentions alone is not possible. It would help if you had strong guidelines and the proper insurance coverage to ensure your operations run smoothly. D&O insurance for nonprofits exists for that very reason.
If you’re not sure which is the best coverage for you, get in touch with an insurance agent for assistance. Check out our agent directory to match with the best insurance agent for you.
Frequently Asked Questions (FAQs)
What are the best companies for D&O insurance for non-profits?
The Best D&O Insurance for 2021 include:
- Travelers : Best Overall
- Hub International: Best for Small Businesses
- Affinity Nonprofits:Best for Nonprofits
- The Hartford:Best for High Policy Limits
- TechInsurance:Best Startup D&O
Why is the cost of D&O Insurance so high?
A D&O policy has such a wide price range. It is not necessarily expensive, but it can become costly depending on a wide range of factors that go into the policy. Typically, an insurance company or an independent broker will assess the risk of the non-profit. The higher the risk, the higher the cost of the D&O coverage will be.