Do you have D & O? That’s directors and officers liability insurance, not some unpleasant medical condition. In all seriousness, D & O is insurance that nonprofits know they need but rarely understand.
There’s good reason for that. According to some insurance industry experts, many D & O policies require dozens of pages, sometimes up to 90 pages, to explain what they cover and what they don’t cover.
While we can’t delve into what your nonprofit’s specific D & O policy covers, we can review the basics with you here and provide you with some information on what D & O insurance is, what it covers, why you need it, and how to ensure you have adequate coverage for your nonprofit.
What Is Directors and Officers Liability Insurance?
Nonprofits typically have both directors and officers leading and guiding the organization. Those in leadership positions should have the knowledge, experience, skills to make sound judgement calls—but that isn’t always the case. And, of course, even the smartest and best people make mistakes.
The litigious environment in which companies, including nonprofits, operate today opens them up to lawsuits in which claims of negligence can lead to expensive judgments. Board members and officers may be unaware of all of the laws governing their conduct and how to avoid mistakes. The results can be devastating both to them personally and to the nonprofits they serve.
What Does It Cover?
There’s no one right answer to this question. Some policies cover financial impropriety while others cover only negligence. Each policy covers different things and policies can be customized for a specific nonprofit. For example, a nonprofit providing medical services may have different coverage than a food panty or a homeless shelter, based upon the risks taken by the officers and directors when making decisions.
Generally speaking, most directors and officers liability policies cover:
- The personal assets of directors and officers and their spouses if they are sued for actions taken during the course of their duties
- Legal fees, settlements, and other costs associated with suits in which directors and officers are involved
Directors and officers may be held responsible for:
- Misuse of company funds or breach of financial duty that leads to losses or bankruptcy
- Misrepresentation of company assets
- Fraud
- Failure to comply with workplace laws
- Intellectual property theft
- Improper actions or lack of corporate governance
Does Your Nonprofit Have Enough Coverage?
Most nonprofits do not maintain adequate coverage. Lawsuits have been increasing over the past several years, especially class action suits, which can leave an organization vulnerable.
If your organization failed to conduct a thorough due diligence on its new board members, officers, and directors, it may already have a potential problem on its hand. Many nonprofits rush to fill vacant board seats and struggle to find willing candidates. Those they do find may lack the experience to avoid costly errors.
It is a smart idea to meet annually with your insurance broker to discuss your current coverage. Your broker can advise you on whether or not increasing coverage is warranted and what the potential risks might be that you need to protect against for your nonprofit. Each organization is different, and each requires varying levels of coverage.
Custom Coverage Is Available
Lastly, know that custom coverage is also available. In fact, many brokers recommend custom coverage so that the nonprofit is adequately protected against its’ unique risks. Since there are so many variables that lead to lawsuits, a skilled broker can help you navigate the potential minefield of risk and shield you from many possible issues.
Director and officer liability insurance is a must-have for your nonprofit leaders. It’s imperative that you have enough coverage so that they can feel confident doing their job. It’s well worth making a phone call to your insurance agent or broker to check on the details of your current policy.
Welter Consulting
Welter Consulting bridges people and technology together for effective solutions for nonprofit organizations. We offer software and services that can help you with your accounting needs. Please contact Welter Consulting at 206-605-3113 for more information.
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