Nonprofit Directors and Officers Insurance
Providing Business Liability Insurance in Austin, Round Rock and All of Central Texas
Does my non-profit organization need D&O insurance? The answer is always a resounding “yes”. No non-profit entity should operate with D&O coverage for several reasons:
Your organization’s Bylaws require it
Most entity have fairly standard organizational bylaws, and almost all standard bylaws contain a provision that requires the organization to indemnify its board members. If the bylaws pledge indemnification, and a claim occurs, the board members are going to turn to the organization seeking indemnification. The organization will be duty bound to pay for the defense of the claim. That wither comes from a D&O policy or the organization’s bank. It will not come from the General Liability policy
You want your organization to be a good steward of the money you raise
You care about your organization’s purpose. Your donors care about your organization’s purpose, too. Being a good steward of the money you raise, means making sure donations go toward the purpose of the organization and not excessive legal fees. D&O insurance is not all that expensive. As a donor to a non-profit, I would much rather have a small percentage of my donation go to annual insurance premiums, then all of it going to a law firm to defend a claim of wrongdoing.
You can’t afford it
Insurance pays for damages, but it also pays for indemnification. The cost to defend a lawsuit can often exceed the amount of damages. Non-profit directors and officers claims are extremely expensive. One claim can wipe out an organization, a year’s worth of fundraising, or a significant chuck of reserved capital. Don’t risk your organization’s financial health.
Directors and Officers versus Management Liability
Directors and officers policies are management liability policies. Sometime referred to as management E&O policies, they protect the Board Members (or officers in a for profit entity) from claims of mismanagement. These claims can come from other board members, staff and employees, and third party customers or vendors. While a general liability protects your entity from sudden and accidental occurrences, an E&O policies protects the entity from erroneous decisions.
What is a claims made policy?
Directors and officers liability policies are “claims made” policies, like all errors and omissions liability policies. This is critical to know, because coverage exists only as long as the policy is in effect, or as long as the entity is in an “extended reporting period” or “tail”. If the policy lapses, coverage going all the way back to the inception of the first policy disappears.
What are some common non-profit D&O claims?
Claims can take on many forms, but the most common are:
- Mismanagement/misapplication of the entity’s money
- Failing to maintain records
- Discrimination in membership
- Practices and activities exceeding the scope of the organizations bylaws
Defense costs are very high in management liability lawsuits
The cost to defend a lawsuit of this type can easily stretch into the 10’s of thousands of dollars. Once recent noted the average cost to defend a D&O suit to be $35,000 on the low end to $100,000 on the high. As these are the averages, it is pretty clear the cost to defend a D&O lawsuit can easily cost more the $100,000.
The importance of directors and officers liability coverage for non profit organizations
Many qualified board members will refuse to be a part of your organization without sufficient D&O coverage. As your organization tries to attract talented potential board members, a lack of D&O insurance will scare many potential board members away. For those board members that do volunteer for your organization, without D&O insurance, their personal assets are in jeopardy. D&O insurance protects your board member’s personal assets from lawsuits against the organization.
Directors and officers insurance coverage limits and coverage parts
It is crucial that the insurance you carry contains sufficient limits for the amount of exposure your organization faces. Let Sunstone Insurance Agency help you determine the right limits of liability for your non-profit organization.
We recommend that organizations carry at least $1,000,000 per claim / $1,000,000 aggregate. Anything less, and we recommend that you make sure the defense costs are outside of the limits of liability. This insurance that the high defense costs do not use up all of your liability limits.
Employment practices liability may be part of a comprehensive management liability policy. If you can secure employment practices liability as part of your organization’s D&O policy, you would be wise to do so. Let Sunstone Insurance Agency shop for a comprehensive management liability policy for your organization.
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