Nonprofit board members offer their time and expertise to support worthy missions. In doing so, they can make decisions that impact the organization, its employees, donors, beneficiaries and other stakeholders. If these decisions are questioned, lawsuits may follow. To protect their personal assets against such lawsuits, board members should make sure they’re protected with nonprofit board insurance.
Liability for Nonprofit Organizations
Nonprofit organizations focus on fulfilling a mission rather than earning a profit, but this does not eliminate liability. Lawsuits may emerge in many different scenarios, including when filed by:
- Regulatory and government bodies. For example, if a nonprofit receives government funding, the board members may be sued for using funds in a way other than what the government body intended.
- Employees and volunteers. Both former and current employees and volunteers, as well as applicants that the nonprofit never hired, may file lawsuits alleging that the nonprofit violated their rights. For example, former employees may accuse board members of wrongful termination, whereas former volunteers could file claims alleging discrimination and defamation.
- Donors could allege that board members misrepresented how they would use donor funds. Lawsuits alleging a failure to keep donor financial data secure are also possible.
- The people who are supposed to benefit from the nonprofit organization’s mission may file lawsuits if they believe the organization and its board members committed wrongdoing that harmed them, such as through misrepresentation.
Directors and officers liability insurance (D&O insurance) helps cover lawsuits accusing board members of wrongdoing, including misrepresentation or misleading statements, breach of duty, mismanagement and neglect. It typically excludes certain claims, such as those involving intentional criminal acts. D&O insurance can help cover defense costs, along with settlements and judgements.
Personal Liability for Nonprofit Board Members
A lawsuit alleging wrongdoing on the part of the board members may name both the nonprofit organization and individual nonprofit directors and officers. In fact, board members may be held personally liable for the actions they take while serving on the board of a nonprofit organization, which could put their personal assets at risk.
Unfortunately, many board members do not understand the risks they are taking when they volunteer to serve on the board of a nonprofit. They may not realize that they could be personally liable for their actions as board members. Some board members may also incorrectly assume their homeowners’ liability insurance will cover them if they are sued. Although homeowners’ insurance typically includes some liability coverage, this only extends to certain types of claims, such as those involving bodily injury or property damage and does not typically cover claims involving managerial decisions, such as allegations of misrepresentation.
Because of this gap in coverage, D&O insurance can provide important protection for nonprofit organizations and their board members.
Directors and Officers Liability Insurance for Nonprofit Organizations
Nonprofit organizations may purchase D&O insurance as a standalone coverage. It is also commonly bundled with employment practices liability insurance (EPLI), and this bundled option may be appealing for a few reasons. First, your nonprofit organization may be able to secure more affordable rates. Second, in situations where you’re unsure if a claim falls under D&O coverage or EPLI coverage, it is easier to have your coverage housed under one roof.
How should nonprofit board members protect themselves?
Serving on the board of a nonprofit organization is an admirable act. Nonprofit board members donate their time, energy and expertise to help nonprofits carry out missions that better society. However, volunteer board members should make sure they are not putting their personal assets at risk.
- Confirm the nonprofit maintains sufficient D&O insurance. Consult with your insurance advisor and check the per-occurrence and aggregate limits of the organization’s policy to determine whether they are high enough. In addition, review any exclusions in the policy that may result in a lack of coverage.
- Avoid coverage gaps when switching insurance companies. A significant amount of time may pass between an alleged event and the related lawsuit and insurance claim. If the nonprofit organization decides to switch insurance carriers, it’s important to avoid coverage gaps that may occur with claims-made policies. An insurance broker may help you navigate these issues.
- Understand your obligations as a board member. Board members are generally obligated to adhere to a duty of care when acting in an official capacity. They must also act in a way that adheres with all applicable regulations and serves the organization’s missions. Review the board member policy manual and make sure you understand your responsibilities.
- Disclose potential conflicts of interest. Even if you do not think there is a problem and you plan to act impartially, you should fully disclose any potential conflicts of interest.
- Seek legal advice when necessary. Before making a decision or taking an action that is likely to lead to disputes, it may be wise to seek legal counsel. This is especially important when making employment-related decisions that could lead to accusations of discrimination.
- Keep up with regulatory and legal trends. Knowing what’s happening can help you stay on top of new regulations and waves of litigation. Recent examples of trends that may lead to liability exposure include cyber liability
- Notify your insurance company as soon as possible if you are facing a claim or even a potential claim. Since insurance policies typically contain clauses that mandate prompt reporting, quickly notifying your insurer is of the utmost importance.
What other types of insurance do nonprofits need?
Nonprofit D&O insurance can provide important executive liability insurance coverage, but nonprofit organizations will likely need other types of liability insurance policies as well. These additional policies may include:
- General Liability Insurance. Sometimes combined with property insurance, general liability insurance provides coverage for third-party claims involving bodily injury, property damage or personal injury.
- Auto Liability Insurance. Although many nonprofits realize they need to insure vehicles owned by the organization, they may not realize they also need hired and non-owned auto liability insurance for vehicles not owned by but used for the organization. This could include personal vehicles that are owned by employees and volunteers. The employees and volunteers still need to maintain their own personal auto insurance.
- Cyber Liability Insurance. Nonprofit organizations that store sensitive data such as financial information of donors or personal details of beneficiaries should consider cyber liability insurance, which can provide protection in the case of a cyberattack in which this data is compromised.
- Employment Practices Liability Insurance. Nonprofit organizations with employees should consider employment practices liability insurance (EPLI), which provides coverage for lawsuits alleging employee rights violations, such as wrongful termination, discrimination and sexual harassment.
- Abuse and Molestation Liability Insurance. Nonprofit organizations that work with vulnerable populations like children may need abuse liability insurance to secure protection for claims alleging abuse by employees or volunteers.
Depending on your organization’s exposures, you may need additional types of liability insurance. Make sure to consult with your insurance advisor to help ensure that your organization is fully protected.
Securing Nonprofit Board Insurance
Don’t let an uncovered lawsuit prevent your organization from carrying out its mission. Nonprofit board insurance is a vital form of coverage for any nonprofit, and Higginbotham can help your organization secure the insurance protection you need. Talk to a nonprofit insurance specialist today.
