We work with a lot of smaller nonprofit organizations and are often asked about the importance of Directors and Officers Liability insurance. But what exactly is this coverage? And how could not having it affect an organization?
What is Directors and Officers Liability Insurance?
This coverage protects the personal assets of an organization’s corporate directors and officers in the event they are personally sued by employees, vendors, competitors, investors, customers, or other parties for actual or alleged wrongful acts in managing an organization.
Policies typically protect the nonprofit as well, covering legal fees, settlements and other costs. Carrying proper coverage can attract higher quality board members and provide peace of mind. The average cost to settle a directors and officers liability claim is currently over $35,000.
Why do Directors and Officers Typically Get Sued?
- Breach of fiduciary duty
- Misrepresentation of company assets
- Misuse of company funds
- Failure to comply with workplace laws
- Theft of intellectual property
- Lack of corporate governance
Many nonprofits recruit directors who are passionate about their cause, yet may not have experience serving on a board. The general responsibilities of running an organization are often less familiar to nonprofit directors than those of for-profit companies. This lack of direct experience and familiarity with business practices can mean than nonprofits operate less efficiently than their for-profit counterparts.
What Are Some Claims Examples?
- The board of directors of a church are sued by a number of their congregants, alleging misrepresentation of the financial status of the organization. The defense costs alone are over $100,000.
- The United States Department of Justice bring suit, alleging misappropriation of funds and failure to revert unused money back to the government. The organization received federal grant money and allegedly used leftover grant money to renovate office space instead of return it to the government. The case closed for a total loss of over $60,000, including $21,000 for defense costs.
- After ten years of employment, an employee was fired for poor work performance. The employee brings a discrimination suit against the organization under the American for Disabilities Act (ADA). The claim is settled for $80,000, with over $20,000 in defense costs.
- A former employee discovered illegal transactions involving retirement funds. Shortly after reporting the violations, she was terminated. She filed suit for retaliation and wrongful termination with the total loss exceeding $80,000.