According to the National Center for Charitable Statistics (NCCS), more than 1.5 million nonprofit organizations are registered in the U.S. This number includes public charities, private foundations and other types of nonprofit organizations including chambers of commerce, fraternal organizations and civic leagues.
As this number continues to increase year after year, more individuals are becoming invested in offering their time and talents to support the causes that are important to them. By committing to these organizations through board involvement or volunteer hours outside of the regular workday, people are making a significant contribution to further the advancement of these individual missions, but are also opening themselves up to often overlooked risk.
THE INDIVIDUAL LIABILITY OF SERVING ON A BOARD
Regardless of what kind of nonprofit organization an individual chooses to be a part of, liability is always present. Individuals who choose to serve on the Board of Directors for a nonprofit are not only liable as a group representing the organization, but their personal assets are on the line as well.
While many believe that a personal homeowners policy would cover any claim relating to an individual’s involvement on a board, that is unfortunately not the case. Homeowners insurance is solely for property and general liability but does not extend to any actions of the individual on behalf of a nonprofit organization. If a nonprofit does not have D&O insurance, and if the claim is against a board member, that board member’s personal assets are at risk.
ENTER DIRECTORS & OFFICERS INSURANCE
This is where management liability insurance comes into play on behalf of the organization, for the benefit of both the organization and the directors. Management liability policies oftentimes include Directors & Officers Insurance (D&O), which is implemented to specifically protect the individuals representing the organization.
D&O Insurance covers the nonprofit organization and extends coverage to any past, present and future directors, officers, committee members, trustees, employees and volunteers. The heirs, executors, administrators and legal representatives of these individuals would also be covered in the event of an insured’s death, insolvency or bankruptcy.
Unfortunately, due to the nature of many nonprofit organizations, D&O insurance is oftentimes overlooked because it is viewed as an unnecessary expense. Because many organizations operate on the bare minimum for operational expenses, there is little left over for risk management.
While many of these nonprofits foster goodwill among their communities, the reality remains that things do in fact go wrong – whether that be a breach of fiduciary duty, failure to fulfill their mission, misuse or mismanagement of funds or improper conduct of employees or volunteers. Additionally, many nonprofits maintain personal information on their donor base which adds additional risk for cyber exposure. Any of these issues could result in a lawsuit that would not only halt or potentially dissolve the efforts of an organization, but without D&O Insurance, each director would also be vulnerable to claims against their personal assets.
OF NON-PROFIT ORGANIZATIONS EXPERIENCED A
D&O LIABILITY CLAIM IN THE PAST 10 YEARS
In addition to a D&O policy, nonprofits should consider additional management liability policies including:
- employment practices liability
- fiduciary liability
- cyber coverage
Depending on the services provided by the organization, other coverages such as professional liability may need to be considered as well. Whether serving on the board of a small community-based nonprofit or a multibillion-dollar enterprise, board members need to recognize what is at stake: reputation, image, credibility and public trust. Damage to any of these areas could impose a much greater cost to the organization as well as an individual than that of an insurance premium.
While many organizations hope for the best out of the people who become involved in their mission, it is a valid concern that some individuals may surprise everyone with negligent or malicious behavior. In these cases, management liability policies will help to ensure that the organization itself suffers minimal fiscal implications and can continue the work that their donors support.
Misuse of funds – $5 million
The (Massachusetts) state attorney general sued a large charitable foundation, alleging the trustees were excessively compensated and devoted insufficient time and resources to support the foundation’s intended purpose. The suit was settled for more than $5M.
THINGS EVERY NON-PROFIT SHOULD CONSIDER:
- Familiarize the board with your mission and their responsibility to minimize litigation exposures
- Implement risk management strategies to prevent or mitigate litigation exposures
- Ensure the organization and board have the right directors and officers liability insurance
- Understand the organizational risk
According to Travelers Insurance, “Nonprofit Directors and Officers Liability”; “Protection for Nonprofits and their Directors and Officers”
Becoming a member of a nonprofit board of directors can be a rewarding experience. The giving of your time, talent or treasure to an organization that you feel passionately about is truly a joy and can have a tremendous impact.
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Greg Deems | CRIS
Senior Vice President | Business Insurance
Greg Deems is a Partner and Vice President, Consultant in the Business Insurance at RogersGray. He specializes in insurance programs for complicated construction risks and property. Greg previously served as the Chairman of the Board of Directors for both the South Shore Young Professionals and the Plymouth Area Coalition for the Homeless, and remains highly involved with both organizations. Greg also volunteers for several committees at the Friendship Home in Norwell. You can connect with Greg on LinkedIn or by email.