Last Updated: May 8, 2022

Directors And Officers Insurance: Extra Security for Nonprofits

TLTR: The nonprofit world is not all charity and acts of service. This article explains the risks involved in running nonprofits and how directors and officers insurance for nonprofits plays a vital role in minimizing these risks.  

Have you ever wondered what it takes to run a nonprofit organization? Nonprofits are essential sources of change for the better and operate to objective to bring positive change. The directors and officers of nonprofits are subject to high ethical standards. They need to reflect those standards in the communities in which they operate. 

But nonprofits can’t run on good intentions alone. The internal and external operations of nonprofits can be subject to misfortune and malfeasance. Or even perceptions of misconduct, even if the people in charge have the best intentions. For this reason, they need excellent directors and offices insurance policies to back them financially for the various risks involved.

In this blog

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 help to further a specific social cause. 

According to The National Council of Nonprofits, there is a common misconception that all tax-exempt organizations are nonprofits. As per congress, there are about three dozen tax-exempt organizations in different tax code sections. Only organizations that come under these sections are considered nonprofits. Some examples of this include: 

  • Social welfare organizations and volunteer organizations – Section 501(c)(4)
  • Childcare organizations that do not run on a profit-based system – Section 501(k)
  • Public charities or private foundations – Section 501(c)(3)
  • Labor unions – Section 501(c)(5)

    Most hospitals, universities, and religious organizations are also considered nonprofits. However, not every organization that is tax-exempt is a nonprofit. U.N. 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 organizations. 

    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 risk with each decision made. The committee can consist of a small group of founders, 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. But the high costs of withdrawn donations, PR hindrances, and lawsuits would all fall on the directors and officers.

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      The Most Important Policies for Directors and Officers Insurance for Nonprofits

      There are multiple areas to cover in directors and officers (D&O) insurance, but these are the most important policies: 

      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 coverage. According to Nonprofit Quarterly, 94 % of the claims under a D&O policy come from employment practices allegations. Having 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 comprehensive 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 
      • Defamation 
      • Failure to accommodate as per Americans with Disabilities Act  
      • Improper employee classification 

        Governance Liability

        Governance claims are few and far between. But it’s still an important policy, particularly for large-scale operations. It covers allegations made against the board of directors and officers of nonprofits that a basic D&O policy wouldn’t cover. An organization would require it in instances of alleged organizational malpractice or internal or external legal mishaps, accidental or otherwise.  Governance claims include the following:

        • Breach of contract
        • Improper board elections 

        Fiduciary Liability

        This coverage is similar to governance liability but pertains more to misuse of funds or financial data. This is an 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. A thriving nonprofit organization would still require these, though considerably lower risk factors.

        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’s also useful for covering lawsuits, particularly libel and slander. 

        Business Owners Policy

        Business Owners Policy is a type of business insurance that combines general liability insurance coverage 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 is commonly known as errors and omissions insurance. This policy can partially cover legal expenses if a client sues your nonprofit for either negligent or unsatisfactory work. It’s important to have this coverage because even the most competent nonprofit organizations can have deals that backfire, resulting in resentful clients.

        Workers Compensation Insurance

        Workers compensation insurance is required by law in most states. It covers employees for medical costs for work-related injuries and illnesses. It compensates for the pay that they may miss when unable to work.  Even if your state doesn’t legally require your nonprofit to have this coverage, it’s ethical to do so and will attract better talent. 

        Some Nonprofit Organizations Claim Scenarios

        Though nonprofits exist entirely to benefit and serve communities, running a large operation to do any task can have certain hindrances. Nonprofits exist through donations and funding rather than the selling of a product. For this reason, securing finances for a nonprofit 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, claims against directors and officers are often made by donors, members, creditors, governmental bodies, and employees, amongst others. Internal disagreements, staff negligence, and client dissatisfaction often happen in the workplace. Occasionally, corruption within an organization can rear its ugly head.  

        In the following instances, D&O insurance for nonprofits is vital:

        Misuse of Funds

        It’s not uncommon for large charitable foundations to face legal issues for misuse of funds. When large sums of money start coming in, trustees may receive excessive compensation. When large amounts of money are met with insufficient time and resources to support the intended purpose, it becomes elementary to claim misuse of funds.

        Let’s say a nonprofit hospital receives large donations for research of a particular cause. Suppose the hospital cannot carry out the research, for any reason, whether it’s an unethical funneling of funds to the trustees or just a lack of time or an operational level inconvenience. In that case, a donor can sue the D&O for misuse of funds. These sorts of lawsuits can easily lead to eventual bankruptcy.

        Creditor Lawsuits

        Creditors can allege inaccuracies in financial data. One common claim can be made if they rely upon receiving their dues by a certain allotted timeframe when they extended credit. This timeframe is often put in place by the creditor outside the control of the nonprofit. The nonprofit board can be sued by creditor companies alleging that they squandered their funds.

        Customer Lawsuits

        Customer lawsuits result from disputes when the products or services rendered are unsatisfactory. While these types of lawsuits are more difficult to evaluate, they can also lead to horrendous PR scandals, withdrawals of donations, or even eventual bankruptcy.  

        For example, suppose family A receives sporting goods from a particular children’s fund. In that case, the quality of the product they receive is lower than what is received by family B. Family A has grounds to allege discrimination. Even if the claims do not reach court, fighting them will be expensive without insurance. Furthermore, the media coverage of this event can lead to massive scandals and potentially end the nonprofit organization entirely.

        Competitor Lawsuits

        Competitor lawsuits often stem from allegations of anti-trust or unfair competition. A competitor can misrepresent the intentions of your nonprofit organization in court in order to create a monopoly on donors and poach internal talent. Other types of lawsuits made by competitors include infringement of a competitor’s trademarks, such as 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. 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 in violation of anti-discrimination laws, employment agreements, or labor laws. Oftentimes, for larger nonprofits, work is departmentalized. A malevolent manager or a bitter employee can sabotage the workplace’s reputation as a whole. So, creating a clear system of reporting and making sure your employees follow that system is crucial for nonprofits.

        Sexual harassment is another important example.  D&O insurance is important to protect victims as well to distance a nonprofit’s reputation from the perpetrator. Maintaining stricter guidelines on employee dating and fraternization might be important in this regard 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 around $4,000 to $5,000 for 50 employees. 

        According to Insureon, amongst the nonprofit organizations that buy insurance from their company, 24% pay less than $400 per year and another 41% pay between $400 and $600 per year. 

        Of course, larger scale nonprofits will require higher amounts of insurance. Ultimately, it depends on the size and the goals of each particular organization. 

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        In Conclusion

        Overall, nonprofit organizations are held to a higher moral standard than for-profit companies. They exist to benefit the community and to bring positive change. However, running a nonprofit on good intentions alone is not possible. You need 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

        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?

        D&O policies have a wide price range. They’re not necessarily expensive, but they can become expensive 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 nonprofit. The higher the risk, the higher the cost of the D&O coverage. 

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