It’s nice to do good works, but being a volunteer on a board of directors is not as easy as it once was. It used to be that a person joined a nonprofit Board so they could make a difference. Unfortunately now, it has become one that could very well hurt a person’s finances and livelihood. From negligence to wrongful acts, there are several different allegations these individuals often face. This also places others they work with in compromised positions, so directors and officers liability coverage is essential.
Directors and Officers Liability Insurance is a type of liability insurance covering directors and officers for claims made against them while serving on a board of directors and/or as an officer of a nonprofit organization. In effect, these policies function as “management errors and omissions liability insurance,” covering claims resulting from managerial decisions that have adverse financial consequences. There are many reasons a claim on this type of policy would be made, but there are a few that are especially common.
Fundraising And Grants
Most nonprofit organizations rely on grants for their funding. People often voice concerns about how the money is being used, and this may result in lawsuits. Organizations should always consider the requirements associated with any grant before applying for it. Any promises made should be reasonable and attainable. If an organization is targeted for mismanaging funds, it could be targeted through legal action, adverse publicity or loss of grant funds.
Financial Oversight Or Fraud
In recent years, the media has been focusing more on nonprofit fraud incidents than for-profit fraud incidents. Some large organizations have failed to provide proper oversight of funding control, which means the money is vulnerable to abuse. Lack of oversight is a breach of fiduciary duty. In addition to grant recipients facing lawsuits, foundations that make the grants may also be targeted in some cases.
Directors and officers policies for nonprofit organizations usually include coverage for employment-related claims. Employment practice liability claims rank highest as the cause of directors and officers claims toward nonprofit organizations. They also make up a significant amount of the overall liability issues these individuals face. Employment-related lawsuits have increased since the Civil Rights Act passed, which gave people the right to punitive damages and jury trials for emotional stress and anguish. While employment practice liability coverage is included in most nonprofit directors and officers policies, it should be supplemented with other forms of coverage. There should be risk management strategies implemented to keep future claims from happening. This should start at the level of the board of directors, and they should be the ones to question the executive director as well as other officials about policies. They should always know whether there is uniformity throughout the organization and if the policies are being carried out properly. The board should have a system set to accurately analyze the effectiveness of the policies.
Liability risks faced by nonprofit boards are serious issues to consider, and they are issues that continue changing as time passes. In the past, charities were seen as innately good, so there were rarely lawsuits brought against them. However, accountability, higher transparency and the growth of a litigious society took its toll on board members. To keep an organization healthy today, every nonprofit should have a good directors and officers policy in place. Directors and officers coverage was expensive in the past, but this business insurance coverage is much more affordable today. It is not a product that is uniform for every policyholder. Protection varies based on exclusions and limitations, so the organization and board members should discuss options with their insurance advisor before making any decisions. Feel free to reach out with any questions regarding D&O coverage for your nonprofit.