Do Nonprofits Need D&O Insurance? Understanding Directors and Officers Insurance

One of the common misconceptions is that nonprofit organizations don’t need directors and officers liability insurance. After all, they’re mission-driven, not profit-driven. In reality, nonprofit organizations aren’t immune to lawsuits, and thousands of claims are filed against nonprofits every year. Many of these claims are against board members, alleging mismanagement, breaches of duty, or wrongful termination and employment practices.

Many nonprofits skip this coverage because they simply think they don’t need it, which puts their leadership team and the organization itself at risk. In this blog, we will explain why nonprofit organizations need D&O liability insurance and how to obtain it.

What Is D&O Insurance for Nonprofits?

Directors and officers insurance for nonprofits is a type of liability coverage that protects the directors, officers, and leaders from claims of mismanagement, negligence, and wrongful employment practices. If a claim is filed against a nonprofit organization and the board members are held personally liable for it, it can lead to costly legal fees and settlements in addition to damaging your organization’s reputation.

Directors and officers liability insurance (D&O) protects your nonprofit board members from these claims by covering legal defense costs, settlements, and other expenses associated with the claim.

Why Nonprofit Organizations Need D&O Insurance More Than For-Profit Corporations?

D&O insurance for not-for-profit organizations is essential because nonprofits face the same liabilities as corporations but without legal or financial protection. This can make the consequences of claims more severe for nonprofit organizations if they don’t have proper protection.

Moreover, corporate employees are professionals who understand the risks of decision-making. Nonprofit board members are mostly volunteers and may not know about their liability exposure. Without nonprofit directors and officers insurance, these employees can face costly claims without even knowing they’re at risk.

Common Misconceptions About Nonprofit Liability Insurance

Misconception #1: Nonprofits Don’t Need Insurance for the Board of Directors

The most common misleading statement is “nonprofit organizations don’t get sued”. Many people assume that because nonprofits are mission-driven, they are automatically immune to lawsuits. In fact, nonprofit organizations are as vulnerable as other businesses to legal disputes and claims, if not more so.

Misconception #2: General Liability Insurance is Enough

Even if your nonprofit organization has general liability insurance, you still need D&O liability insurance for nonprofits to protect your board members. Each of these insurance policies covers a different type of claim:

General Liability Insurance in Florida: Covers third-party claims of bodily injury, property damage, or personal injury.
Nonprofit Insurance in Florida (D&O): Protects the board members against claims of mismanagement, breach of duty, conflicts of interest, and wrongful act allegations.

Misconception #3: Volunteers Can’t Be Held Liable

Many directors believe that the Volunteer Protection Act (VPA) shields all volunteers from personal liability claims. Although the VPA offers protection to volunteers, it only applies under certain circumstances. That means board members and volunteer leaders can still face personal lawsuits in many cases, and the financial losses can be major if they aren’t covered under D and O insurance for nonprofits.

Misconception #4: D&O Insurance is Too Expensive for Nonprofits

Nonprofit organizations have limited resources to operate with, and many of them skip insurance because they think it’s too expensive for their budget. However, nonprofit board insurance is affordable, especially when compared to the impact of a single legal claim against your organization.

Do Nonprofits Need Directors & Officers Liability Insurance?

Directors and officers insurance for nonprofit organizations is a necessity that shouldn’t be overlooked. Volunteer board members, though competent and dedicated, can still make mistakes or take decisions that lead to legal disputes. Whether it’s a claim of personal assets mismanagement or wrongful act allegations brought by employees or donors, it can cost your nonprofit thousands of dollars.

On average, claims against nonprofit organizations cost around $35,000 to settle, which can easily drain the organization’s limited budget and damage its reputation. That’s why D&O insurance for nonprofit board members is essential to ensure your board members focus on the organization’s mission rather than legal battles.

Why Nonprofit Board Members Need D&O Insurance?

Your nonprofit organization’s directors and officers need insurance to provide coverage against:

Personal Liability Exposure: Directors and officers can still be held liable for decisions made on behalf of the organization.
Legal Fees: The claims filed against nonprofit organizations can be very expensive, including defense costs, settlements, and other related expenses.
Wrongful Act Allegations: Claims arising from mismanagement, breach of duty, and conflict of interest can be filed by donors, employees, and stakeholders, and on average, they cost around $35,000 to settle.
Internal Conflicts: Disputes and conflicts between individual directors and officers can lead to claims. Directors’ and officers’ liability can help solve these disputes.
Reputation Management: High-profile claims can harm your organization’s reputation. Directors and officers insurance for nonprofits can help your organization respond professionally to claims.

How Much D&O Insurance Is Needed for Nonprofits?

Most nonprofit organizations need between $1 million and $2 million in directors’ and officers’ liability insurance coverage. Smaller organizations with fewer volunteers and low public visibility can start at $500,000 in D&O liability coverage. Meanwhile, larger nonprofits may need $3 million to $5 million or more for enhanced insurance protection.

How Much Does Directors’ and Officers’ Insurance Cost?

On average, directors and officers insurance for nonprofit organizations costs between $500 and $2,500 annually for a standard insurance policy with $1 million in coverage. The cost of D&O insurance for nonprofits is directly impacted by several factors, such as:

The Organization’s Size: Larger nonprofit organizations pay higher insurance premiums than smaller ones.
Risk Levels: Nonprofits involved in international work or work with high-profile donors are considered high risk, so they pay higher premiums.
Number of Volunteers: The number of directors and officers covered under this insurance policy can increase your insurance premiums.
Policy Limits: The coverage limits you choose for D&O insurance for nonprofit board members directly impact your insurance rates.
Claims History: A clean record of claims can help you get better insurance rates.
Location: Legal environment and state laws directly affect your insurance premium. If your nonprofit is located in a state with more protective laws for nonprofit entities, like Florida, you might get lower insurance premiums.

How Does Not-for-Profit D&O Coverage Protect Board Members?

D&O insurance for nonprofit board members helps protect the organization’s leaders from claims brought against them for decisions made while performing their legal duties. This insurance provides coverage for legal defence costs, settlements, and judgments arising from lawsuits or regulatory investigations. Whether the claim is from government regulators, donors, employees, or other stakeholders, D&O serves as a safety net to ensure your executive director and board members are always protected.

What Are the Board of Directors’ Liability Insurance Limitations/ Exclusions?

D&O exclusions are either for actions within the company’s control or out of anyone’s control. Some of the common situations this policy excludes are criminal charges, intentional breach of contract, general liability claims, and employee-related injuries. Without the right coverage in place, board members’ personal assets could be at risk.

Some of the common exclusions for board of directors insurance for nonprofits are:

General Liability Claims: Claims of third-party bodily injury, property damage, and personal injury (related to media) are covered under the general liability policy, not D&O.
Employee-Related Injuries: D&O doesn’t cover workplace injuries, accidents, and illnesses. These issues are covered by workers’ compensation insurance in Florida.
Sexual Harassment Claims: These claims are covered under employment practices liability, not D&O board insurance for nonprofits.
Fines and Punitive Damages: These types of damages are generally excluded, depending on your jurisdiction and policy.
Criminal Acts: Criminal acts, such as fraud, theft, and intentional wrongdoing, aren’t covered by D&O or any other insurance policy.
Personal Profits: If a board member is found guilty of making personal profit to which they weren’t legally entitled, D&O will likely not respond to the claim.
Insured vs. Insured Claims: Many policies don’t cover lawsuits between insured individuals within the organization. However, this exclusion can sometimes be modified with a policy enhancement.

Are Directors and Officers Offered Immunity Under the Volunteer Protection Act?

The Volunteer Protection Act provides limited protection for volunteers in nonprofit organizations against personal liability claims. Unfortunately, VPA isn’t enough because it doesn’t cover legal defence costs and might not even apply in several states.

That’s why insurance for board members of nonprofits is a must because it covers:

Legal defense costs
Court fees
Judgments and settlements

Choosing the Right D&O Insurance Policy for Your Nonprofit Organization

What to Look for in a Policy

When purchasing D&O insurance for your nonprofit organization, you should first asses your organization’s needs and budget. We know you’re looking for affordable options, but you need to balance between the price and the coverage in order to get the comprehensive protection you need.

Here’s what you should look for when purchasing D&O insurance:

Coverage Limits: Most nonprofits need between $1 million and $2 million in directors and officers coverage.
Endorsements: Ask about endorsements that can enhance your coverage, such as Employment Practices Liability (EPLI).
Defense Costs: Check whether the defence costs are inside or outside the policy limits. Inside-the-limits coverage means legal expenses reduce the amount available for settlements.
Exclusions and Limitations: Review your policy limits and exclusions very well to ensure you’re not missing out on coverage.
Regulatory Support: Ensure your policy covers claims brought by government regulators because they’re the most common source of claims filed against nonprofits.

Other Insurance Policies Nonprofits Should Consider

Business Owner’s Policy in Florida: This policy is important for nonprofits because it bundles general liability insurance and property insurance into one affordable policy.
Commercial Property Insurance in Florida: This coverage protects your nonprofit’s physical assets, including your premises, equipment, inventory, and furniture.
Small Business Insurance in Florida: Many small business insurance coverage options are perfect for nonprofits, such as property insurance, general liability, and other policies.
Commercial Umbrella Insurance in Florida: This coverage provides additional liability protection in case you receive a claim that exceeds the limit of your standard general liability insurance.
Business Income Insurance in Florida: This helps compensate lost income if your nonprofit’s operations are paused due to a covered event like a hurricane or fire.
Data Breach Insurance: Nonprofits usually have digital databases that contain donors’ sensitive information. Data breach insurance protects these databases if they are compromised due to cyberattacks, hacking, or accidental exposure.

Looking for Reliable Insurance in Your State?

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Do Nonprofits Need D&O Insurance? – FAQs

Do All Nonprofits Need D&O Insurance?

Yes, all nonprofits need D&O insurance, no matter their size or mission. Board members make important decisions about money, staff, and programs, and if someone disagrees with those decisions, they can file a lawsuit, which can lead to major financial setbacks.

Who’s Covered Under a D&O Policy?

The executive director, directors, officers, and other volunteer board members are covered under a D&O policy. Some policies may also cover senior staff, committee members, but it’s recommended to check with your insurer to confirm who is covered.

Can Volunteers Be Held Liable?

Yes, volunteers can be held liable, especially if they’re involved in making important decisions on behalf of the organization. That’s why D&O insurance is so important because it allows volunteers to focus on the organization’s mission rather than legal battles.

Do Board Members of Nonprofits Need Insurance?

Yes, board members of nonprofits need insurance because they can be personally sued for the decisions they make on behalf of the organization. Even if they’re volunteers, they could face legal claims for things like mismanagement or conflicts of interest.

What Is the Best Insurance for Nonprofit Board Members?

The best insurance for nonprofit board members is directors officers’ liability insurance because it protects them from personal financial risk if someone files a claim against them for decisions made while doing their board duties. It covers legal defence costs, settlements, and other related expenses.