A common misconception is that only large non-profits require directors and officers insurance (D&O insurance). Still, smaller or medium-sized companies and even non-profit organisations can be just as exposed to potential claims. Therefore, regardless of size, any non-profit organisation should consider acquiring directors and officers insurance to protect their key employees and board members against costly legal proceedings and compensation claims (read more here).
Non-profits are often guilty of recruiting directors and leaders who are passionate about whatever cause the company is serving but who may lack the necessary experience to operate as a director. Decisions that are made can impact many different areas of the organisation. If there is a less than desirable outcome or the suspicion of wrongdoing, then a claim can be made.
Studies show that the number of claims being brought against the directors or officers of non-profits is a substantial proportion of total D&O claims. For example, a recent survey by the Insurance Information Institute showed that 31% of companies had a D&O claim against them within the previous five years, and 58% of the claims were made against nonprofit organisations.
To protect the individual directors, managers, leaders, and other key employees, a director’s and officer’s insurance policy will shield individuals from any claims that are made and cover the costs and fees associated with a legal defence.
What is directors and officers insurance?
Director’s and officer’s insurance is designed to protect individuals employed by the company against claims for alleged wrongful acts. In addition, the insurance will cover the cost of legal settlements and protect individuals and their spouses from personal losses. Therefore, directors of a company will frequently expect that D&O insurance cover is provided.
Claims can be brought against the directors of a non-profit for many reasons, but in the case of D&O insurance, the alleged offences are often financial in nature, including:
- Financial abuse
- Misuse of company funds
- Illegal trading
- Breach of trust
Along with financially-based claims, D&O insurance can defend against other issues like wrongful dismissal, mismanagement, workplace law violations, and theft of intellectual property.
While coverage is designed to protect officers and directors of the non-profit, it will not protect against any illegal acts of wrongdoing. It will also not usually cover the cost of any fines or penalties imposed by regulatory bodies or other governing offices.
For non-profits and other business types, claims can be brought by many different entities that have involvement with the company. Vendors, customers, shareholders, employees, or other parties who believe that they have reason to bring a lawsuit can all make a claim. D&O insurance holds harmless officers of the non-profit for losses that are due to their decision making and role in the business.
This type of insurance provides a different type of protection from other types of business insurance. For example, public liability, product liability, and general liability will provide cover for many aspects of trading and are commonly held policies among non-profit corporations to protect the company from the financial burden of claims.
D&O insurance is designed to protect the individual members of the organisation and their financial assets. Not only does the coverage protect the current members of the organisation, but it will also protect past and future directors and officers of the company. If a director leaves, the non-profit, D&O insurance will still shield them from legal issues arising during their time working for the business.
How much non-profit directors and officers insurance do I need?
The level of D&O insurance that non-profit organisations will require depends heavily on several factors. Things like the number of board members, size of the company, experience of directors, and the industry. The level of risk will need to be carefully assessed to obtain a policy with adequate limits.
Non-profits can also be subject to scrutiny by different regulatory bodies, government offices, and local authorities. These agencies can often launch investigations into non-profit organisations to ensure compliance with all necessary laws, regulations, legal restrictions, or health and safety rules.
As well as a higher instance of authoritative oversight, non-profits can also rely heavily on volunteers due to restricted funds, and this can also increase exposure to potential claims and increase the occurrence of things like unintentional breach of duty. Claims can arise from not only fiduciary matters but also from discrimination accusations and employment issues.
When determining coverage limits for non-profits, all potential risk factors will need to be considered to obtain adequate D&O insurance. Therefore, it could be beneficial to consult with a professional insurance advisor (e.g. a specialist D&O insurance broker) to ensure that policy limits are sufficient to protect the non-profit directors and other key employees within the organisation.