Non-profit organizations are operated for the benefit and interests of a specific group of persons that make up the association. Those individuals, along with members, employees, customers, creditors, and government agencies are all potential plaintiff’s against directors & officers of nonprofit associations due to mismanagement. The fundamental responsibility of directors & officers is to carefully represent and carry out the interests of the organization’s members and other constituencies in directing the business affairs of the association within the law.
Directors & Officers Liability Insurance [also known as “D & O”] responds to protect an association’s board of directors and other insured persons and entities, for the insured perils surrounding actual or alleged wrongful acts of error, omission, misstatement, misleading statements, and neglect or breach of duty. A Directors and Officers Liability Policy covers defense expenses and financial damages or settlements. The policy does not cover wages, fines, taxes, penalties, or multiplied damages.
All such policies include coverage for an organization’s directors and officers. Because a director or officer can sometimes be held personally responsible for acts of the association, most directors and officers want to be insured rather than risk their personal assets. Officers include the executive director and possibly a few “key” employees. However, many policies do not include staff and volunteers or the entity itself.
Keep in mind that if a claim is filed against a board member, in many cases it will also be filed against the nonprofit association as well.
A view is held that D & O insurance is essentially legal defense insurance. While most cases brought against a board will be dismissed (thrown out), there will still be legal fees to pay. Defense costs for hiring lawyers can easily exceed $50,000. However, damage claims are most certainly a possibility, as well, and this mportant part of the coverage should not be minimized.
Directors and Officers Liability Insurance is different from Professional Liability or Errors and Omissions Insurance.
Although these coverages are often confused, they are not the same. Professional liability / errors and omissions insurance applies to performance failures and negligence with respect to products and services, not the performance and duties of the executive team.
Directors & Officers Liability Insurance only covers non-bodily injury claims. Non-bodily injury claims include employment related claims and mismanagement of funds. It is a different type of insurance known as General Liability Insurance that covers bodily injury and property damage claims, and most claims are of this type. While General Liability is a must-have type of insurance for an association, it is sometimes difficult for a non-profit association to determine if they require Directors & Officers Insurance or not. To help in determining need, examples of claimants and exposures to liability follow:
Examples of Claimants There are at least nine general categories of persons who assert causes of action against the directors, officers and trustees of nonprofit corporations:
1. The corporation itself;
2. Other directors and trustees;
3. Members of the organization;
4. Beneficiaries of the organization’s services;
7. The general public;
8. Attorneys General representing public interest; and
9. Government agencies asserting tax claims and other violations of law.
A. Under violations of duties of care or diligence, may be these and more:
1. Failure to manage and supervise the activities of the organization;
2. Neglect and waste of assets including improper investments;
3. Improper delegation of authority.
B. Under matters involving a breach of loyalty may be the following among others:
1. Any kind of self-dealing;
2. Taking corporate opportunities;
3. Purchases of corporate property by directors and officers;
4. Sales of goods to the corporation by directors and officers;
5. Fees and commissions paid to brokerage firms, banks and other suppliers of services with which directors and officers have relationships; and
6. Other situations involving conflict of interest.
Your insurance needs are unique, therefore we believe in person to person service. Call or e-mail an Ark Agency Representative for an estimated premium, policy and company details, and qualification requirements. We work with several insurance companies and rates and coverage conditions vary. We will help you determine which application to use and advise on how to put insurance in force.
*General information is provided on this insurance topic. Acting on our coverage recommendations does not guarantee coverage if you have a loss or claim.