What Is Directors and Officers Insurance for Nonprofits?

Directors and Officers (D&O) insurance provides liability coverage for individuals serving on boards and in executive leadership roles within nonprofit organizations. It protects the personal financial assets of these leaders against legal claims from decisions and actions in their official capacity. Despite their mission, nonprofit directors and officers face personal liability risks resulting in substantial legal and financial burdens.

Understanding Directors and Officers Insurance

Directors and Officers insurance shields the personal assets of individuals in governance or management positions within a nonprofit from allegations of “wrongful acts.” These acts encompass errors, omissions, misleading statements, neglect, or breaches of duty during organizational responsibilities, such as decisions on financial management.

This specialized coverage differs from general liability insurance, which primarily covers bodily injury or property damage claims. While general liability protects the organization from operational risks, D&O insurance focuses on the personal liability of individuals for their leadership decisions.

Specific Liabilities for Nonprofit Leaders

Nonprofit leaders, including directors, officers, and key volunteers, can face personal liabilities despite their organizations operating without a profit motive. They are accountable for stewardship and compliance with legal and ethical duties. Common risks involve breach of fiduciary duty, including the duty of care (informed decisions), loyalty (acting in the organization’s best interest), and obedience (adhering to mission and laws).

Mismanagement of organizational funds or assets represents another substantial liability. This can involve allegations of improper allocation of donor contributions, poor investment decisions, or failure to maintain adequate financial controls.

Nonprofit leaders are responsible for compliance with federal and state regulations, such as IRS tax laws for tax-exempt status, fundraising, and charitable solicitation rules. Non-compliance can lead to penalties for the organization and personal liability for leaders.

Employment practices claims, such as wrongful termination, discrimination, harassment, or retaliation, are frequent lawsuits against nonprofits. Claims from donors regarding misuse of restricted funds, or actions leading to loss of tax-exempt status, also expose leaders to personal legal challenges. Even with volunteer protection laws, board members can be personally liable for mismanagement.

Key Coverage Areas of D&O Policies

A typical D&O policy provides financial protection against covered legal claims. This includes defense costs, encompassing legal fees, court costs, and other expenses incurred while defending against a lawsuit, regardless of merit. These defense costs can be substantial.

Beyond defense, D&O policies cover settlements to resolve covered lawsuits and judgments awarded by a court. This ensures personal assets of directors and officers are not solely responsible for large payouts. Some D&O policies extend coverage to the nonprofit organization itself, known as entity coverage, protecting the organization in claims alongside individuals.

D&O coverage is often structured into distinct sections, commonly referred to as “sides.”
Side A coverage directly protects individual directors and officers when the organization is legally or financially unable to indemnify them.
Side B coverage reimburses the nonprofit for amounts it has paid to indemnify its directors and officers for covered claims.
Side C, or entity coverage, provides protection for the organization itself, often for claims where both the individuals and the entity are named in the lawsuit.

Common Policy Exclusions

Directors and Officers insurance policies contain specific exclusions for claims or actions not covered. A common exclusion relates to fraudulent or criminal acts by insured individuals. Policies do not cover intentional dishonesty, illegal personal profit, or actions resulting in illegal personal advantage.

Claims involving bodily injury or property damage are excluded from D&O policies, as general liability insurance covers these. Claims from events before the policy’s retroactive date (prior acts) are excluded. Pollution-related claims are also excluded.

D&O policies exclude coverage for fines and penalties imposed by regulatory bodies or courts, although the defense costs for associated claims might still be covered. Specific exclusions can vary between policies and providers.

Securing D&O Coverage for Nonprofits

The process of obtaining D&O insurance begins with information gathering. Nonprofits compile data on their mission, operational activities, and governance structure. This includes board size, committee structures, and key leadership experience.

Insurers require insight into the organization’s financial health, including financial statements, budgets, and funding sources. Past claims history or potential liabilities must be disclosed to assess the organization’s risk profile and premium levels.

Once assembled, the nonprofit can engage specialized insurance brokers with expertise in nonprofit coverage. The application process involves requesting quotes from multiple carriers and completing forms with organizational and financial data. Understanding policy terms, conditions, limits, and retentions is a final step before securing coverage. Factors influencing premiums include the nonprofit’s size, annual budget, activity complexity, and claims history.