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Does My Nonprofit Need D&O Insurance?

By: Lisa Johnson

Hundreds of nonprofits face lawsuits every year, but many nonprofits assume they don’t need directors and officers (D&O) liability insurance. Unfortunately, if your nonprofit doesn’t have a D&O policy, your directors, staff and possibly even your volunteers may be at risk. D&O insurance protects your nonprofit from litigation related to negligence, wrongful termination and asset mismanagement.

Unfortunately, many nonprofits fail to obtain this type of coverage because they don’t think they need coverage. This article covers what D&O insurance is and why it’s important in protecting your team from litigation.

What Is D&O Insurance?

A D&O policy normally covers allegations of a wrongful act, an error, a misleading statement, neglect or a breach of duty in connection with a person’s performance of duties. Simply put, it’s a safety net that you should consider putting in place — even when you trust your board to make good decisions and act in the best interest of your nonprofit.

You may need D&O insurance protection for areas like:

  • Mismanagement of funds or investments
  • Employment issues, including harassment and discrimination
  • Self-dealing
  • Failure to provide services
  • Failure to fulfill fiduciary duties

Should a lawsuit arise, D&O insurance can help protect both your nonprofits and its key individuals such as directors, officers, employees and even volunteers and committee members.

Claims-made Policies

An unusual characteristic of D&O policies is that they are claims-made. This means that the insurer pays for claims filed during the policy period even if the alleged wrongful act occurred outside of the policy period. For example, the alleged wrongful act could have occurred three years ago under different leadership and be eligible for reimbursement.

If someone files a claim against your nonprofit, you should contact your insurer to determine whether the matter is insurable and if defense costs are covered. Most policies reimburse the insured for reasonable defense costs, in addition to covering judgments against the insured.

Another important feature of claims-made policies is that they provide no coverage for lawsuits filed after a policyholder cancels — even if the alleged act happened when the policy was still in place. However, if your policy expires or you cancel the policy, you may be able to buy extended reporting period (ERP) coverage. This can provide coverage for newly filed claims on actions that allegedly occurred during the regular policy period.

Decide What Coverage You Need

D&O coverage varies by insurer. Before you look for a policy, determine what coverage your nonprofit needs such the people and actions you want to cover and the amount of protection. For example, your policy doesn’t need to cover bodily injury or property damage, because general liability and workers’ compensation insurance usually cover these claims.

Premium amounts depend on the extent of coverage as well as your organization’s type, operating characteristics and location. As with most insurance coverage, D&O premiums are likely to be lower if you opt for higher deductibles.

Do You Need Coverage?

Not every nonprofit organization needs D&O insurance. In some states, volunteer immunity statutes provide limited protection for negligence. Such protection, however, doesn’t extend to federal statutes. The best way to ensure you have the right coverage in place is to talk with your financial and legal advisors about whether your nonprofit needs D&O insurance and what coverage you need.

Need Help?

Contact us online or call 800.899.4623.

This post was originally published in September 2013 and has been updated for accuracy and comprehensiveness.

Published July 14, 2021

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