The National Center for Charitable Statistics estimates there are more than 1.8 million nonprofit organizations in the United States. This diverse group includes:
While the sizes and types of these nonprofits are extremely broad, they all share one characteristic: the need for liability protection. Unfortunately, there’s a widespread belief that directors and officers of nonprofits don’t have any exposure to personal liability. That is not true.
In fact, 63% of nonprofit organizations have reported a directors and officers (D&O) liability claim in the past 10 years, according to a Towers Watson Directors & Officers Liability Survey.
There are numerous myths about the exposures nonprofits face. Below are some common misconceptions about nonprofit organizations’ liability risks, and the truth about those risks.
Myth 1: Because most directors and officers of nonprofits are volunteers, they are not liable for their actions.
The Volunteer Protection Act (VPA) and other similar laws are limited and do not completely protect the directors and officers of nonprofits. Although the VPA does provide some immunity to volunteers acting on behalf of agencies, it doesn’t offer immunity to the organization itself. As a result, the organization and its employees need insurance. Directors and officers (D&O) liability insurance helps pay for the legal defenses of volunteers facing liability claims.
Myth 2: Nonprofit organizations have a lower risk of litigation than for-profit companies.
Directors and officers of nonprofits are actually at higher risk. The problem stems from the fact that many nonprofits:
Myth 3: Directors and officers can’t be held personally liable.
The truth is that anyone involved in managing a nonprofit organization can be held personally liable for any failures of oversight or misconduct that occur while they are in charge. The organization and its directors and officers can be sued for a long list of issues, including mismanagement of assets, harassment, neglect, wrongful termination, breach of duty, mistakes in judgment, misleading statements and improper conduct.
Myth 4: The absence of shareholders reduces risk and the need for D&O coverage.
Any stakeholder can file a lawsuit, including donors and contributors, beneficiaries, regulatory bodies, state attorneys general, association members, third-party affiliates, vendors, fundraisers and current or former employees.
So how can nonprofits manage such broad liability risk?
The first step in any good risk management effort is prevention. That typically entails well-conceived policies that are written and disseminated to all participants in the nonprofit’s affairs. Those policies should be reviewed by a compliance attorney, and adherence should be documented and memorialized in a disaster-proof location. Everyone from the highest officials of the organization to the newest volunteers should be educated on the policies and sign an acknowledgment of their understanding.
But even with consistent application of best practices, claims against a board, its individual members and executives can occur. For this reason, all nonprofits should carry some level of D&O liability insurance.
A D&O insurance policy can be written to protect the board officers and directors, and the entire organization from liability claims. D&O liability insurance covers claims that come from management decisions and helps with defense costs, settlements and judgments.
D&O insurance covers actual or alleged wrongdoing in two main areas:
In addition to D&O insurance, you should consider the following management liability coverages:
Employment practices liability insurance (EPLI): Most claims covered under D&O policies arise under the employment practices liability (EPL) banner, which covers claims alleging wrongful acts related to employment. These claims are the most frequent, time-consuming and costly. The most common types of employment practices claims include sexual harassment, racial and gender discrimination, retaliation, defamation, wrongful termination, failure to accommodate in accordance with the Americans with Disabilities Act, and improper classification of employees.
Cyber liability: Every organization that uses technology faces cyber risk, and these threats get more serious as technology gets more complicated. Cyber liability coverage is vital because organizations must be prepared for data breaches. Cyber policies cover the breach of donor, employee and confidential client data, as well as paper document exposures.
Employee dishonesty: Also called crime coverage or a fidelity bond, this type of coverage helps replace money stolen by employees. Because employee fraud typically takes place over a long period, a nonprofit can sustain a great deal of damage. And it can lose the trust of the community.
D&O liability insurance is never cookie-cutter. Every organization faces its own exposures and has unique needs. Review your nonprofit clients’ operations, processes and personnel to help determine what mix of protection the leadership and organization need.
We help you protect your mission
Nonprofits play a vital role in their communities, but they also face unique risks that can jeopardize their mission. MinistrySure specializes in tailored insurance solutions to protect your organization, directors, and officers from liability. Contact MinistrySure today to ensure your nonprofit has the right coverage to safeguard its leadership, finances, and future.
