Meant to protect against missteps or breaches of duty by an organization's directors and officers, D&O insurance for nonprofits is liability insurance that covers the financial costs of claims that fall within the categories of governance, employment, or fiduciary liability.
Some things you might need nonprofit D&O insurance to cover include:
- Alleged mismanagement of funds or organizational assets, like grant funds or individual donations;
- Errors in handling or disbursing employee benefits;
- Program participants who feel you didn't provide the service you claimed; or
- Personnel challenges, like wrongful termination, discrimination, or harassment.
Claims can start with complaints by employees, donors, government regulators, or even vendors who provide services to your nonprofit.
And whether or not these claims wind up being valid, your organization may still incur significant costs fighting the charges. D&O insurance for nonprofits helps pay for lawyers' and filing fees, judgments, and any settlements that may arise from the claim.
Why Is D&O Insurance Important for Nonprofits?
Board members assume all the risk that comes with oversight of a nonprofit organization. And when you're in the business of fundraising, handling budgets, responding to potential public relations concerns, and overseeing human resources, there's a lot of potential risk.
Over the course of the COVID-19 pandemic in particular, many small nonprofits have had to face layoffs, temporary closures, and more. These are things many nonprofit leaders may have been unfamiliar with—and mistakes made while managing these challenges even in a time of crisis can have costly legal repercussions.
According to the Nonprofits Insurance Alliance Group, there are claims filed by 1 in 100 nonprofits every year. And of these cases, the average settlement is $28,000. If you do go to court, you can expect to spend even more—and that's whether or not you win!
What Does Nonprofit D&O Insurance Cover?
D&O insurance covers claims in three major areas.
The first is employment liability. More than 90 percent of claims against nonprofit organizations fall under this heading, which includes improper employee classification; harassment and discrimination, as well as a retaliation claims; defamation; and a failure to provide appropriate ADA or other accommodations.
Fiduciary claims against your nonprofit might include things like allegations of improper fundraising or misuse of donations or grant funds; errors in payroll or taxes; missteps around employee benefits or health plans; improper filing or reporting when it comes to revenue; or any high-level investigations you may find yourself involved in.
Lastly, D&O insurance can help protect you from governance liability claims, which aren't as frequent, but can still be a costly headache! Challenges that might fall into this category include breaches of contract with vendors or property owners, board elections, and more.
Questions to Ask Before You Commit to a D&O Nonprofit Insurance Plan
As you begin to explore D&O insurance, there are questions you'll want to make sure you're asking.
What does this policy cover?
The language used in D&O policies can be left intentionally vague in ways that either benefit your nonprofit or leave you out to dry in favor of the insurance company's interests. You'll want an experienced broker to help you understand what—and who—is covered.
How much does the policy cover?
You'll want to understand what the coverage limits are and how they stack up when compared with your risk. A $500,000 or $1 million policy might seem like a lot of coverage at face value, but you'll need to dig in deeper to figure out whether or not those limits would actually cover you if needed.
Does this policy cover the particular risks of my organization?
If your organization carries particular risk, you'll need to understand how a standard policy will or will not provide adequate coverage. Learning more about your organization's risk profile can also help you figure out if you can lower your nonprofit’s potential risk, as well.
Safeguard Your Organization with D&O Insurance
Be careful not to let the task of securing D&O insurance fall to the wayside.
Legal claims against your nonprofit can wind up costing you a pretty penny—so make sure you’re as protected as possible!