Nonprofit Directors and Officers (D&O) Liability Insurance

Persons who are directors, trustees, and officers of nonprofit organizations are subject to personal liability and lawsuits due to failure to properly perform their duties. Nonprofit directors and officers liability insurance is an excellent way to transfer many of these loss exposures to another party (an insurance company). Are you insured for any nonprofit boards that you sit on?

The term “nonprofit” in this discussion is a bit of a misnomer, since many nonprofit entities can, and do, earn a profit. Furthermore, there is a wide range of nonprofit organizations whose services benefit either the public at large or the members of the nonprofit entity itself. Examples include hospitals and nursing homes, condominium and homeowners associations, educational institutions, foundations, religious and social service facilities, trade associations, fraternal organizations and chambers of commerce.

Many actions by persons within the nonprofit organization can trigger a lawsuit in today’s legal climate. For example, over 50% of all D&O claims against nonprofits involve improper employment related practices, such as wrongful termination, discrimination, breach of contract, and sexual harassment.

Suits may also be brought by any of the following:

■Beneficiaries, who feel that they were either denied benefits of the nonprofit or received less than they were entitled to receive.
■Donors, who allege that their contributions are either being wasted or are not being used to advance the purposes of the organization, as stated in its charter.
■Outside parties, who claim libel, slander or plagiarism due to the content of a presentation or publication by the organization.
■Board members, who sue other directors, claiming misinterpretation of the charter (such as improper decisions regarding what funds and services are to be provided to the public) or a conflict of interest.
■State attorney generals, alleging mismanagement or antitrust activity.
The directors and officers of nonprofits are subject to duties of loyalty, obedience, and diligence. In recent years, many states have enacted legislation designed to eliminate or reduce the liability exposure of nonprofit organizations and their directors, officers, employees, and volunteers. However, none of the state laws apply to liability that arises out of federal statutes, such as the Civil Rights Acts and the Americans With Disabilities Act. Moreover, the state laws themselves are still subject to judicial review in many cases.

One way that a nonprofit entity can protect its directors and staff is via the indemnification provision in its by-laws. Although such indemnification is allowed to some extent by all states, it may not be available if either the entity cannot sustain the losses and expenses caused by the improper acts of the directors and officers, or if specific circumstances reveal that indemnification is not permitted.

The protection shortcomings that arise despite the state liability limitation statutes, indemnification, and a thorough loss prevention program may be effectively managed by purchasing a comprehensive nonprofit D&O insurance policy.

The “insured” in the most comprehensive policies includes both the nonprofit itself (in D&O parlance, the “entity”) and its subsidiaries, plus its directors, trustees, officers, employees, volunteers, and committee members. The protection applies to wrongful acts, as defined in the various policies, plus defense costs, which are covered whether or not a judgement or settlement results from the litigation.

The marketplace for nonprofit D&O insurance is very favorable for the purchaser at present. There are a number of insurance companies that currently offer nonprofit D&O coverage, creating a competitive atmosphere that can result in low prices, broad coverage, and minimal deductibles for buyers that shop carefully for this protection. Now is a good time to make sure that your personal assets are properly protected from any potential liability you may have as the result of services you perform for nonprofit organizations!