D&O and Other Management Liability Risks for Non-Profits


Non-Profits + InsuranceNon-profit organizations are a major sector in the business community. There are more than 1.5 million such organizations in the U.S., and the sector accounts for almost 10 percent of all salaries and wages paid in the country, according to The Nonprofit Almanac.

Non-profits face a number of unique legal and financial risks. For example, many non-profits depend on volunteers to carry out their work. But traditional business insurance policies typically only cover paid employees, leaving a coverage gap that must be addressed.

These unique risks have led to a number of policies that are specialized for the non-profit sector. Unfortunately, many organizations still don’t understand the risks they face and the best way to mitigate them.

Risks Faced by Non-Profits and Insurance Considerations

So what are the most commons risks facing non-profits? One of them is fraud. Fraud comes in a variety of forms, from employee theft to intentional misrepresentation. For example, in an extreme case, a non-profit employee could embezzle funds.

There are also risks associated with fundraising. An organization might discover that a fraudulent group is using its name to raise funds, but never see said funds. If this group hosts an event in the non-profit’s name, the non-profit could even be considered liable for any injury claims stemming from the event.

Additionally, non-profits can come under scrutiny for alleged misuse of funds. In this case, the directors and officers of a non-profit can actually be held personally liable for the organization’s actions. It’s the reason most non-profits purchase Directors & Officers (or D&O) insurance policies, which can help cover legal costs and settlements resulting from lawsuits brought against members of the board.

Directors & Officers Insurance

A comprehensive D&O policy can be vital to recruitment of qualified board members and trustees – no one wants to risk their personal assets and those of their family.

While many non-profits do protect themselves through D&O insurance, they might not be fully aware of how their policy works. A Willis Towers Watson survey found that 18 percent were not sure how their primary D&O program was structured, although 63 percent said they’d had D&O claims in past 10 years.

In today’s litigious society, directors and officers of a non-profit face more potential lawsuits than ever. From harassment suits to claims of libel and slander, the list of possible alleged wrongdoings is quite long. According to a Wyatt Nonprofit Organizational Directors’ and Officers’ Liability Survey, the average cost to defend such a lawsuit can be between $35,000 and $100,000 – a whopping bill for most people to face personally.

In order to improve financial protection, non-profits must carefully examine their D&O policies to ensure they include the features they might need. Policies from different providers vary, and the market is competitive, making comprehensive policies relatively affordable. Some specific things to look for when purchasing a policy include:

  • Full entity coverage: full entity coverage includes claims made against the organization itself, even if no directors or officers are named.
  • No deductible: almost all non-profit D&O policies don’t require a deductible for claims against directors and officers.
  • Policy limits: coverage limits can vary, so non-profits should care carefully assess the amount of coverage they may need.

Additional Risk Mitigation Techniques

Many non-profits employ risk management techniques to protect themselves from the risks discussed above. One of the most effective techniques to prevent fraud and misuse of funds is to develop and enforce internal controls – that is, policies and procedures that dictate how financial resources are accessed, handled, and distributed. Typically a non-profit’s board and senior management would be responsible for implementing and monitoring internal controls.

Non-profits aren’t subject to the same external scrutiny that for-profit organizations are, which can lead board members to become complacent or careless in enforcing compliance. However, they should still require comprehensive and frequent financial reports to comply with legal requirements. Many organizations employ a certified public accountant (CPA) to ensure compliance and recognize any discrepancies.

Finally, non-profits can face the same property damage and personal injury claims that any business could face. Therefore, it’s important for non-profits to ensure they have sufficient general liability and umbrella insurance policies in place to mitigate these common risks.

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