Word to the Wise: Understanding D&O Liability Insurance
Your board is critical to the success of your nonprofit organization. Board members must meet certain standards of conduct, including governing the nonprofit according to its bylaws, exercising reasonable care when making decisions, and assuming certain responsibilities—and liabilities—related to their roles as directors.
With these responsibilities come risks, and many board members may not even know the extent of their personal exposure. Protecting your board members—and attracting new ones—often requires an insurance policy designed specifically for this purpose.
Directors and officers (D&O) liability insurance indemnifies the organization and its directors, officers, and trustees for damages and defense costs arising from lawsuits alleging “actual or alleged wrongful acts” not covered under the organization’s general liability policy. These types of allegations fall into two main areas: employment-related issues and governance and fiduciary issues.
Employment practices claims: The most common and costly D&O claims are related to employment practices. Employee termination triggers the majority of employment-related claims against nonprofits and accounts for a majority of total awards.
Examples of employment practices allegations include sexual harassment, racial and gender discrimination, retaliation (whistleblower claims), defamation, failure to accommodate (Americans with Disabilities Act claims), and claims involving improper employee classification (exempt vs. nonexempt, independent contractor vs. employee).
Fiduciary and governance claims: Although they represent less than 10 percent of all D&O claims, fiduciary and governance claims can be significant. The most common types of fiduciary and governance claims involve breach of contract, improper board appointments, mishandling of assets, improper revenue reporting, failure to properly file IRS reports and payroll taxes, and mismanagement of employee benefit plans.
D&O policies can pay for legal fees, judgments, settlements, and other court costs. Without D&O coverage, directors are personally liable and must pay these expenses out of their own pockets. For this reason, some individuals might be unwilling to serve as directors or officers if your organization doesn’t provide adequate D&O insurance.
While the direct costs of litigation and settlement can be expensive, litigation has other significant costs to the organization, including the time required for executives or officers to prepare for and undergo depositions. Also, reputational damage to the organization can be costly, and it’s not unusual for claims to take more than a year to resolve.
What’s the Cost?
Several factors determine the cost of D&O policies, including the size of the nonprofit, number of employees, and the strictness of human resources and governance policies. As with all insurance, lower risk means lower cost.
Many insurance companies will write D&O policies only as add-ons to their general liability policies, and all D&O policies do not have the same coverage. Certain types of claims are specifically not covered by D&O policies. Consult with your insurance advisor to ensure you have the proper coverage. He or she can also help you assess and mitigate risk to lower your premium costs.