By: Dawn Sharon, Nonprofit Executive Underwriter for Berkeley Select, an MNA Affiliate
Passion and purpose. These are the reasons so many join the board of a nonprofit organization. But, did you know your responsibilities as a director or officer could put your personal financial assets at risk? Even if no wrongdoing occurred, the cost to investigate and defend a claim can be crippling to the organization and your personal finances. Court costs and attorney fees can add up quickly, accumulating into the tens of thousands of dollars even when a claim has no merit.
What is D&O Insurance?
Directors and Officers Liability insurance helps protect directors, officers, committee members, volunteers and the nonprofit organization from allegations of failing to act in the best interest of the organization. Oftentimes, small nonprofits forgo this important insurance coverage due to their limited budgets and thinking that because of the good work they do for the community, no one is going to sue them. The reality is vendors, donors, competitors, employees, government regulators or others can sue nonprofits of any size.
What Could go Wrong?
Raising donations is a critical source of funds for many nonprofits. But, how these dollars get allocated and the expectations from large donors can be a risk for the organization. For example, a donor makes a sizable monetary donation thinking it will be used for the construction of a new facility. When the project does not move forward and funds are allocated elsewhere, the donor alleges misuse of the donation and sues the board of directors.
Other risks for directors and officers include termination of memberships from the organization. For example, a country club terminates an individual’s membership based on alleged harassment of one of its employees at the club. The ex-member then sues the board for wrongful termination of membership and defamation.
A comprehensive D&O policy helps cover the costs associated with defending a director or officer of the organization when these claims arise. This includes legal expenses such as attorney fees, court costs, investigations and filing of legal paperwork. If the insured is held liable, the policy will help cover the damages and settlement costs the insured is legally obligated to pay.
Why do I need Employment Practices Liability Insurance?
Another misconception among nonprofits is they do not need to purchase Employment Practices Liability insurance since they have no or very few employees. This insurance coverage helps protect the leaders and the organization from employee, volunteer or client related claims of discrimination, harassment or retaliation type of allegations. Even organizations with a few employees can have claims brought against them for allegations of employment-related wrongdoing. For example, due to budget cuts and lower donations, a nonprofit has to reduce its staff which included an employee who worked there for over twenty years. The employee alleges wrongful termination based on their age.
Other risks to consider includes the negative publicity that can be brought about by investigations resulting in a compromised reputation. Having a comprehensive risk management program in place will help protect your directors and officers and the nonprofit organization.
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