Directors and Officers Insurance for Nonprofits and its Cost

Nonprofit board

Directors and Officers (D&O) insurance safeguards nonprofit leaders. It provides financial protection for legal claims against them linked to their roles as directors and officers. Like all insurance, this protection comes with a cost. This article delivers a straightforward overview of “Directors and Officers Insurance for Nonprofits,” including an overview of the coverage provided by a D&O policy, coverage differentiators, factors influencing pricing, and real-life claim examples. Gaining insights into these aspects is crucial for nonprofits to navigate their own governance effectively and make a good purchasing decision.


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    What is Directors and Officers Insurance?

     Directors and Officers (D&O) insurance is a risk management tool designed to provide financial protection for individuals in leadership roles within nonprofit organizations and for the organization’s balance sheet. This insurance policy steps in when board members and officers encounter legal claims or financial liabilities directly related to their duties and responsibilities in managing the organization.

    The primary purpose of D&O insurance is to shield the personal assets of these leaders, ensuring that their individual finances are not at stake when addressing legal challenges tied to their roles. This protection is especially vital for nonprofits, where board members and officers volunteer their time and expertise to guide the organization. Without D&O insurance, these individuals might be personally responsible for legal expenses or settlements, potentially jeopardizing their financial well-being.

    Nonprofit leaders may face various legal and financial risks in their roles. For instance, lawsuits from stakeholders, employees, or regulatory bodies alleging mismanagement, discrimination, or financial impropriety. Financial risks could arise from the cost of legal defense or settlements in such cases. D&O insurance acts as a safeguard in these situations, ensuring that the financial burden is borne by the insurance policy rather than the organization or personal assets of board members or officers.

    Read article: How does D&O Insurance Work?

    Wait… wouldn’t the nonprofit organization pay to defend me?

    Now, you might be wondering, if I’m volunteering my time, wouldn’t any legal claims and associated costs be handled directly by the nonprofit organization? Wouldn’t the nonprofit draw from its financial resources to defend me as a director? The answer is maybe, but it’s not guaranteed. 

    Consider the following situations:

    • Many organizations operate on a “break-even” basis. What if the nonprofit does not have the financial means to cover legal expenses or liabilities? In the absence of organizational funds to cover legal defense or settlements, the personal assets of the board members may become vulnerable to satisfying legal judgments. It’s also important to note that bankruptcy does not absolve the organization or its leaders from legal responsibilities.
    • What if the nonprofit organization is restricted or prohibited from indemnifying and protecting a board member? Board members must be aware of the specific indemnification provisions outlined in the organization’s bylaws and applicable laws.
    • If the nonprofit has the funds to defend its directors, what would be the impact on the organization? Could the organization face financial strain impacting its ability to carry out its core mission or other operational activities? If the organization diverts funds to cover legal bills, could there be a direct impact on program funding? What about donor or stakeholder perception? Would trust be eroded?

    You can see how Directors and Officers insurance is a practical necessity for nonprofit organizations. It is a risk transfer tool that serves as a financial safety net for leaders when legal and financial risks emerge from their roles and responsibilities. It allows these individuals to carry out their vital functions with the assurance that their assets are protected, without the nonprofit’s balance sheet being impacted. 

    Understand the basic structure of D&O policy and ask for more

     Directors and Officers (D&O) insurance for nonprofits offers coverage that is integral to protecting the organization and its leadership from legal and financial risks. D&O insurance typically provides three main insuring agreements:

    1. Side A Coverage: This protects individual directors and officers by reimbursing them for personal losses when the organization cannot indemnify them. It is crucial in situations where the nonprofit may not have the financial capacity to provide indemnification (for example in the case of bankruptcy).

    2. Side B Coverage: This reimburses the organization when it indemnifies its directors and officers, covering the costs of legal defense and settlements. It helps preserve the organization’s financial resources.

    3. Side C Coverage:  Also known as entity coverage, this protects against legal claims brought against the organization itself.  It is important to note that while nonprofits may not be as heavily regulated as many for-profit enterprises, the potential for legal challenges still exist.  This is especially true when the organization is involved in fundraising, social services, or even amateur sports where diversity and inclusion initiatives are changing the way boards must operate.

    Not all D&O policies are the same

    Though policies may appear to have the same three insuring agreements, not all policies offer the same protection. As with any insurance policy, it is important to read the policy terms and exclusions to understand the breadth of coverage. For example, a basic policy may cover defense costs and settlements but will also have limitations that organizations should be aware of:

    • Scope of Coverage: Basic D&O policies may have a narrower scope, focusing primarily on claims related to alleged management or fiduciary errors. They may not provide coverage for broader issues such as employment practices, fiduciary liability, or media liability.
    • Exclusions: Basic D&O policies may include exclusions, specifying certain situations or types of claims that are not covered. Common exclusions may relate to fraud or intentional illegal acts. Not-so-common exclusions may be a professional services exclusion or an absolute exclusion for bodily injury and property damage.
    • Prior Acts Exclusion: This is a provision in a D&O insurance policy that acts like a cut-off date. The purpose is to exclude coverage for claims arising from wrongful acts that occurred before the policy’s effective date. 
    • Some policies may include additional limits for certain types of coverage such as Side A Coverage: A basic policy may not offer an additional Side A limit dedicated exclusively to providing coverage for individual directors and officers in situations where the organization is unable to indemnify them. It acts as an extra layer of protection for personal assets when the organization cannot provide indemnification.

    It’s crucial for nonprofits to carefully assess their risk profile and financial capacity when selecting the most suitable D&O insurance policy for their needs. While basic policies are often more budget-friendly, organizations should carefully evaluate their risk exposure and potential vulnerabilities. Investing in a more extensive D&O insurance policy with additional features and higher coverage limits is often a prudent choice.

    Factors influencing the cost of D&O insurance for nonprofits

    The cost of a $1.0 million D&O policy for a nonprofit organization ranges from may range a few hundred to thousands of dollars, or even more. Multiple factors affect the cost, with each playing a crucial role in determining the overall premium. Understanding these factors is essential for nonprofit organizations seeking comprehensive coverage:


    Size and financial health of the nonprofit:

    The size and financial health of a nonprofit are key determinants of D&O insurance costs. Larger organizations with higher revenues and more extensive operations may face increased exposure to legal risks, impacting the insurance premium. Financial stability influences insurance rates. Organizations with financial strength often receive lower rates because they are considered lower risks.

    Read more: 5 Ways Financial Statements Deliver D&O Risk Insights

    Employee count and employment practices: 

    Employee count is another pivotal factor influencing the pricing of Directors and Officers (D&O) insurance for nonprofits, particularly concerning employment practices risk. As the number of employees increases, so does the potential for employment-related claims. Larger workforces may encounter a higher likelihood of issues such as discrimination, wrongful termination, or harassment allegations. Insurance providers take this into account when determining premiums, emphasizing the importance of maintaining effective risk management strategies to mitigate potential employment-related liabilities.


    History of legal issues or claims:

    The nonprofit’s history of legal issues or claims is a significant factor influencing D&O insurance costs. Insurance providers assess the organization’s risk profile by examining past legal challenges. A track record of frequent or severe claims may lead to higher premiums. That is, underwriters will make a judgment on how probable it is for legal problems to happen in the future.


    Other considerations:

     1. Nature of operations: The specific activities and services provided by the nonprofit can impact insurance costs. Organizations involved in high-risk areas, such as advocacy or those dealing with children or other vulnerable populations, may face higher premiums.

    2. Governance practices: Strong governance practices, including risk management protocols and adherence to legal and regulatory standards, can positively influence insurance costs. Conversely, inadequate governance practices may result in higher premiums.

    3. Policy limits and deductibles: The chosen policy limits and deductibles also affect costs. Higher coverage limits and lower deductibles typically lead to increased premiums but provide more extensive protection.

    4. Industry benchmarks: Nonprofits can benchmark their insurance costs against industry standards. Understanding the average premiums within their sector helps organizations assess the competitiveness of their insurance rates.

    These are some of the factors nonprofits must carefully evaluate when securing D&O insurance. Customizing coverage to the organization’s needs and adopting a proactive risk management approach can help secure cost-effective protection for directors and officers.

    Watch course lesson: Understanding governance 

    Nonprofit real-life examples:

    Here are some real-life examples of various scenarios leading to lawsuits against nonprofit boards. The purpose of sharing these news links is to give you a glimpse into the diverse challenges organizations may encounter. While these instances are specific and contextual, they serve as valuable lessons for understanding the legal landscape surrounding nonprofit governance and the potential consequences when issues arise.

    Government sues non-profit for fraud and excessive salaries:

    The Manitoba government is suing non-profit organization STEPS Resources Community Support Services and its executives, Glenda and Rick Fyvie, for fraud and “excessive” salaries. The province alleges that STEPS purchased an operating system in 2017 from a company owned by the executives without a legitimate reason, and both executives and board members were aware of the fraudulent transactions. The government seeks nearly $2.3 million in damages, legal fees, and a constructive trust on amounts or property owned by the executives, claiming they took advantage of funding for personal benefit.  These allegations have yet to be proven in court.


    Former president of Human Rights Campaign sues organization alleging racial discrimination

    Alphonso David, the former Black president of the Human Rights Campaign (HRC), the largest LGBTQ advocacy group in the U.S., has filed a lawsuit accusing the organization of racial discrimination in his firing. David, who served as HRC’s president for two years, alleges unequal treatment of nonwhite employees within the organization. The lawsuit follows David’s termination. He was let go due to his involvement in advising former Governor Andrew Cuomo about sexual harassment allegations.  HRC’s board deemed this involvement a conflict of interest.


    Crime Watch Twitter operator sues think tank for copyright infringement

    Shelley Jo Leeson, operator of the CrimeWatchMpls Twitter account focusing on crime reporting in the Twin Cities, has filed a federal civil complaint against the Center of the American Experiment. Leeson accuses the conservative think tank of copyright infringement for embedding her real-time tweets on its website without permission. Alleging eight counts of infringement, Leeson is seeking damages of $150,000 for each post and attorney fees. Leeson claims the center used her reporting to raise funds without proper attribution or compensation.


    In summary, D&O insurance is a vital investment for nonprofits, shielding leaders from legal and financial risks. Safeguarding board members and officers is crucial, especially in a landscape with common legal challenges. Despite the immediate cost of D&O insurance for nonprofits, directors should see D&O insurance as a prudent long-term investment. Careful cost-benefit analysis ensures confident navigation of challenges, preserving leadership and the ability to fulfill operational objectives. In the dynamic nonprofit environment, D&O insurance is a proactive measure for resilience and success.

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