Nonprofits usually have a certain demographic that they serve. Often the allure of a nonprofit organization is that it attracts like-minded individuals that have a passion for the cause that the nonprofit works on. And the most passionate of these individuals often become board members.
At that point, they also enter a world of new liability should they be sued for malfeasance or making a decision that ends up affecting a third party or constituent of the organization. Any number of circumstances can lead to legal action that threatens both their financial security as well as that of the not-for-profit organization they work for.
Nonprofits are especially susceptible to lawsuits. According to a survey by the Insurance Information Institute, out of the 31% of companies that had a directors and officers claim against them within the previous five years, 58% of them were nonprofit organizations.
And according to Blue Avocado nonprofit magazine, the average claim against nonprofits’ directors and officers costs around $35,000 to settle. One of every 10 claims reaches $100,000 before the parties agree on a settlement.
Poor fiscal acumen
Running a nonprofit requires sophistication and experience. Unfortunately, in many cases, while passion drives board members to serve, they may lack the requisite skills that a directorship calls for.
They may be poor decision-makers due to their inexperience or lack of financial and operational insight. Often times, they also lack sufficient knowledge of their legal duties and responsibilities regarding the nonprofit they serve. They may fail to take the same business approaches to decision-making as they would when working for a for-profit corporation.
And if they make poor decisions that spur a lawsuit and they are held responsible for their actions, their assets could be threatened.
While liability insurance can ensure that a nonprofit has the monetary protection it needs to weather such a lawsuit, a liability policy will usually not cover the actions of directors and officers – and hence their assets are at serious risk.
Besides the risk of paying damages, they also have to pay for their own lawyers to defend against the case. Yes, the company’s liability policy may pay to defend the company against the lawsuit, but it won’t cover the legal expenses of directors and officers.
The answer to this problem is nonprofit directors and officers liability insurance. This coverage could mean the difference between an officer or director successfully navigating a lawsuit and surrendering all of their assets because of it.
D&O insurance policies typically cover:
- Legal defense costs,
- Settlement costs,
- Judgments arising from lawsuits and wrongful allegations brought against the nonprofit.
Regardless of the size of a nonprofit or its board of directors and officers, every nonprofit organization should secure an appropriate amount of D&O insurance.