Non-profit organizations play an important role in making our local communities, nation, and the world better places to live. Because they focus on contributing to the wellbeing of society, non-profit organizations are sometimes reluctant to spend part of their budget on the purchase of an insurance product designed to protect the personal assets of their Board of Directors.
That may explain why more non-profits aren't buying Directors and Officers (D&O) Liability Insurance, as evidenced by a recent benchmarking survey of non-profits by The Mahoney Group and other brokerages in the Assurex Global network. The survey revealed that just 64 percent of the non-profit organizations surveyed purchased D&O insurance.
Directors and Officers liability insurance protects the individual members of the Board of Directors, the management of an organization, and the organization itself against allegations that the organization was mismanaged. D&O coverage covers claims made by a third party for alleged losses caused by management’s acts, errors, omissions, misstatements, or misleading statements. Sources of claims against the directors and managers of a non-profit organization can include creditors, local or state officials, and members of the public.
Among the many reasons claims are filed are:
- Failure to adequately protect vulnerable clients
- Failure to maintain adequate financial records
- Jeopardizing the organization’s tax-exempt status.
Here are five reasons that non-profit organizations need to purchase D&O insurance.
1. Protect the Entity
Regardless of the good intentions of the non-profit’s mission, Directors and Officers claims happen. According to the Chubb Group, non-profit D&O claims constitute almost two-thirds of their D&O claims. Even if the legal justification of the claim is bogus, litigation is expensive. In the absence of insurance protection, such litigation will adversely affect the non-profit organization’s budget, jeopardizing its ability to achieve its mission.
2. Protect the Current Directors
Non-profit directors and officers are often volunteers who work for little or no compensation. Yet by agreeing to serve on the board, they put their personal assets at risk. The bylaws of the non-profit often call for the organization to indemnify its board members from loss. Yet, few entities have the financial wherewithal to do so in the absence of directors and officers liability (D&O) insurance.
3. Recruit New Directors and Advisors
Building an effective Board of Directors is a major challenge for non-profits. They are often competing with other organizations to get community leaders, business executives, and people with financial resources to serve on their board. The absence of non-profit D&O liability insurance impedes the process of recruiting the people that the organization most desires to serve on its board.
4. Reduce Reputational Risk
One need only to open a newspaper to see the damage to an organization’s reputation by a D&O claim. The litigation against the Boy Scouts of America for failing to protect its members from predators is a particularly egregious example of the damage to an organization’s reputation. D&O insurance can provide money to compensate victims and reduce the reputational risk to the organization.
5. Secure the Giving and Grant Pipeline
It is simply a fact that people and foundations will be less likely to support an organization that has not protected itself against the financial consequences of D&O liability litigation. D&O insurance can provide defense against fraudulent claims and thus help secure the giving pipeline of the organization.