Protecting Your Purpose: Why Non-Profits Need Directors & Officers Insurance

Meet Nick Matsie, Underwriting Manager for Berkley Select’s Nonprofit commercial insurance line.

In this informative article, Nick gives us an overview on the importance of nonprofits investing in comprehensive management liability that includes Directors & Officers Coverage, Employment Practices Liability, and Fiduciary Liability.

“Oftentimes, small nonprofits forgo important insurance coverage due to their limited budgets. Their thinking being, that because of the good work they do for the community, no one is going to sue them. The reality is vendors, donors, competitors, employees, government regulators or others can sue nonprofits of any size.“

Passion and purpose. These are the reasons so many join the board of a nonprofit organization, but did you know your responsibilities as a director or officer could put your personal financial assets at risk?

In today’s economic and legal environment, it is more important than ever to make sure you and your organization are properly protected. Social and economic inflation continue to drive increases in court costs, attorneys’ fees, and overall settlement values across the country year over year. As such, even if no wrongdoing occurred, the cost to investigate and defend a claim can be crippling to the organization and your personal finances.

What is D&O insurance?

Directors and Officers (D&O) Liability insurance helps protect directors, officers, committee members, volunteers, and the nonprofit organization from allegations of failing to act in the best interest of the organization. Oftentimes, small nonprofits forgo this important insurance coverage due to their limited budgets. Their thinking being, that because of the good work they do for the community, no one is going to sue them. The reality is vendors, donors, competitors, employees, government regulators or others can sue nonprofits of any size.

What could go wrong?

Raising donations is a critical source of funds for many nonprofits, but how these dollars get allocated and the expectations from large donors can be a risk for the organization. For example, a religious organization was sued for breach of contract and unjust enrichment. The claimant allegedly donated $300,000 for the construction of a new place of worship on land the organization already owned. The claimant stated that the insured decided against building and used the funds for another purpose. In actuality, the insured was facing an unfriendly and unyielding city who continuously put up roadblocks, causing delays and extra costs, and for this reason the construction plans were abandoned. Ultimately a settlement was reached wherein the donated funds were returned – over $400,000 in defense costs were incurred for this highly contentious dispute.

Another example of risk faced by nonprofit directors and officers and organizations would be termination of memberships from the organization. In this real-world scenario involving an insured country club, the claimant – the spouse of a member, started a social media campaign claiming that certain of the insured’s policies were discriminatory against women. She also took out a radio ad to air her allegations and the story was picked up by local print media. The dispute escalated when the couple was expelled from the club for conduct which was detrimental to the club and the other members. Claimant filed suit, alleging defamation, discrimination, retaliation, and fraud. The matter ultimately settled for $50,000 plus defense costs.

Why do Nonprofits need Employment Practices Liability insurance?

Employment Practices Liability (EPL) insurance is a key component of an insured’s executive liability coverage, and is frequently packaged with their D&O. Unfortunately, a common misconception among nonprofits is they do not need to purchase EPL insurance since they have no or very few employees. This coverage helps protect the leaders and the organization from employee, volunteer or client related claims of wrongful termination, discrimination, harassment or retaliation. Even organizations with a minimal or no employees can have claims brought against them for allegations of employment-related wrongdoing, and in recent years employment practice claims have been on the rise. These claims often arise out of complex employment situations, and the “human element” can lead to large settlements just based on cost of defense.

For example, a social service agency was sued by a former employee for wrongful termination. During her employment, the plaintiff suffered a mental breakdown and was involuntarily committed following a diagnosis of bi-polar disorder. She was unable to provide the necessary medical clearances needed to return to work, and after significant dialogue her employment was eventually terminated. The claimant alleged that she was illegally terminated because of her actual or perceived disability. Prior to a suit being filed, the parties agreed to an informal investigation and evaluation process, culminating in a pre-suit mediation. At mediation a settlement was reached in the amount of $125,000, and defense costs of over $30,000 were also paid.

A comprehensive executive liability policy helps cover the costs associated with defending a director or officer of the organization when these claims arise. This includes legal expenses such as attorney fees, court costs, investigations, and filing of legal paperwork. If the insured is held liable, the policy can help cover the damages and settlement costs the insured is legally obligated to pay.