How to Protect Yourself as a Non-Profit Organization Board Member

Managing or serving on the board of a nonprofit organization(NPO) remains both a noble and necessary activity. NPOs are often involved in protecting the vulnerable; providing services to those in need; and filling educational gaps for those subject to being mislead by charlatans and thieves to name just a few activities.

Director's and Officer's Liability Risks
However, despite these noble and necessary efforts, NPOs' Directors and Officers(D&O) have liability risks and need to be clear as to what these risks are and what adequate protection consists of. In this litigious society NPOs who are sued are experiencing an average of $235,000 in legal fees even if the suit is unfounded.

Specifically, Directors and Officers (D&O) are exposed to such employment claims as wrongful termination, breach of employment contract, discriminatory hiring practices, failure to employ or promote, retaliation, negligent evaluation, sexual harassment, wrongful discipline, invasion of privacy, deprivation of career opportunity, employment related defamation, wrongful infliction of emotional distress, and mismanagement of employee benefit plans. Employment claims represent the area where more than 80% of the claims arise.

The Need for an Employee Handbook
Therefore, before even the first employee is hired an Employee Handbook should be developed based on the models currently being used in similar type of service organizations and modified later if necessary. The employee should be given one and required to sign a statement that they have received it. A workers compensation policy which covers injury, illness, and death that result from workers performing their job or being on the job is also essential.

Other Types of Claims
The other types of claims that arise are non-employment claims include misallocation of funds, breach of fiduciary responsibilities, self-dealing/conflict of interest, anti-trust or restraint of trade violations, defamation, invasion of privacy, negligent financial advice to third parties, failure to maintain insurance, interference with contract, breach of contract, failure to accredit or certify, and infringement of trademark, patent, or copyright.

Lawsuits can originate from such diverse sectors as beneficiaries who feel that they are entitled to more than they received; board members who disagree with a majority decision on the use of funds; donors who feel that their contributions have not been used to further the expressed aims of the organization; state attorney generals who institute legal proceedings against the board for issues such as mismanagement of funds and antitrust violations, and other government officials such as the IRS and the Dept. of Labor alleging violation of federal or state laws.

The Difference Between a D&O and a GL policy
It is important for NPOs to make the distinction between what a D&O liability policy covers and what a General Liability (GL)policy covers. A GL policy does not cover what a D&O liability policy is designed to cover. A GL policy is broad coverage and is designed to cover bodily injury, property damage, theft, criminal acts, deliberate fraudulent acts, pollution, nuclear reactor or radiation, and litigation pending prior to the original inception date of the policy.

To narrow this down, a GL policy then essentially covers bodily injury and property damage, whereas the D&O policy covers wrongful acts which includes "wrongful management decisions" and never includes bodily injury and property damage. Therefore, it is essential that an NPO have both policies.

To summarize, the D&O liability policy must not only cover the claims made against the organization, but also full prior acts, and defense costs. Moreover, not only should the D&Os be covered, but also the employees, volunteers, and committee members. The best D&O liability policy does all of this.



Are you a board member of a nonprofit organizations? Have you had any of these concerns? Call (773) 614-3201.

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Directors and Officers Liability Insurance - A Must For Non-Profit Organizations

Many of us serve as volunteers on boards of non-profit organizations. If we do so we not only need to be respected for our service, but also protected from any potential law suits. 

Directors and officers of non-profit organizations who generously donate their time to advance the cause of an organization created to serve the public shouldn't have to be concerned about a lawsuit. 

However, at least 45 percent of non-profit organizations can expect to experience at least one directors and officers' liability claim during its existence.

The Necessity of D&O Insurance and What it Covers

Directors and officers liability insurance therefore, has become a necessity. This type of insurance protects board members from financial loss due to alleged wrongful acts, including conflict of interest; financial mismanagement; dissemination of false or misleading information; and negligence, including the failure to supervise the activities of others and evading responsibilities. Whether or not there is an actual liability, a lawsuit filed need to be defended and legal costs will accrue whether your organization wins or loses the suit.

Who Sues Non-Profit Organizations
A close look at who would be likely to sue the organization reveals that it is most likely to be one of the organizations' own employees with claims of sexual harassment, discrimination, wrongful termination, retaliation, invasion of privacy, failure to grant tenure, negligent evaluation, failure to employ or promote, wrongful discipline, deprivation of career opportunity, wrongful infliction of emotional distress, and mismanagement of employee benefit plans. 

In fact, among other potential plaintiffs such as benefactors, members, and clients, 80 percent or more of all claims against non-profit organizations are from the organization's own employees.

Directors and officers liability insurance has continued to evolve over the last 35 years from just covering officers and directors in the beginning to now covering acts by other personnel including trustees, employees, volunteers and the organization itself. 

What Does D & O Insurance Cover 
The coverage includes the cost of defense which can mitigate the risk of serious financial harm to the organization and its board members. Recent data indicates that the average cost to defend a claim is approximately $150,000, and the average settlement or damage award is approximately $375,000.

D&O Insurance - A Necessity in Today's Litigious Society
Once again an organization cannot afford to be without directors and officers liability insurance in these litigious times. A half million dollar law suit can easily wipe out most nonprofit organizations. Furthermore, for an organization to be fully protected it needs directors and officers liability insurance, general liability insurance which covers injuries and damages resulting from the organization's premises, products, and operations; workers compensation which covers a work-related sickness or injury; and a fidelity bond which protects the organization against financial embezzlement, forgery or theft.

Call (773) 614-3201 if you have any questions or interested in this coverage.

Key Features in D&O Liability Insurance

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Nonprofit organizations are in jeopardy when attempting to exist without Directors and Officers Liability insurance. Liabilities, which are best defined as obligations that legally bind an individual or organization to settle a debt or to settle a wrongful act they may have committed, need to be anticipated and accounted for.

Given that you have taken the responsibility to acquire Directors and Officers Liability insurance, what happens when a claim is filed. Depending on the event, it would be covered either under the claims made form or under the occurrence form. The event that triggers coverage under either form is known as the "coverage trigger". If the determination of coverage comes under an occurrence trigger, the policy in force on the date of the event causing the loss must respond with both the defense and indemnity. Occurrence policies do not provide coverage for prior acts. However, they remain available for claims that arise years after they have expired.

If the determination of coverage comes under a claims made trigger, the policy may reach backwards in time and provide coverage for claims made today from negligent acts or errors and omissions that occurred before the policy was purchased. In that this form covers prior acts, a good faith statement (or either a certification of warranty) that the organization had no knowledge of the mistake, error, or controversy on the date that the coverage was purchased, is a necessity.

The best type of insurance coverage for board members would be coverage which includes both forms and therefore both triggers. 

It is a must for board members to get expert consultation regarding these key features before making a purchase.

If you have any questions, contact me for a free consultation.

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