Directors and officers insurance is designed to protect the board members and the officers against all legal costs if they are ever sued for decisions made on the behalf of the company they represent that resulted in a financial loss.
The board of directors makes serious decisions regarding how a nonprofit is run. Directors may establish the nonprofit’s strategies and goals, determine how the funds are spent, and set employee’s salaries.
This means liability protection is required for decisions made. In fact, it is likely that they expect it.
However, if you aren’t fully aware of what this insurance is or why it is needed, keep reading. Here you can learn everything you have ever wanted to know about directors and officers insurance and how it can protect your nonprofit organization.
Understanding the Purpose of Directors and Officers Insurance
Directors and officers or D&O insurance will pay for any lawsuits that are related to the decisions made by the board of directors or officers that are appointed or directed by the board. Often, this policy is referred to as management liability insurance.
With D&O insurance, you receive coverage for an array of things, such as:
Accusations of Mismanaged Funds
If one of the board members is ever accused of making a bad decision about an investment or misusing the funds that belong to the nonprofit, they may be sued. Even if the lawsuit doesn’t have merit, the attorney’s fees and related court costs may drain the company’s finances quickly.
The Failure to Meet Set Regulatory Standards
If a charitable organization or another nonprofit business doesn’t meet regulatory standards, it is the board of directors that may take the blame. The D&O insurance held by a nonprofit organization can help cover the cost related to hiring an attorney along with the other legal expenses. These may occur because of a lack of compliance with set industry regulations or standards.
The Failure to Perform Official Given Duties
While officers and directors only hold a certain amount of influence over a company’s success, if something goes wrong, fault and blame may rest on their shoulders. If board members are sued because they did not provide their fiduciary duties or because they did not fulfill a legal requirement, then things can get expensive. The D&O policy will help cover the costs of hiring an attorney or other related expenses.
How Much D&O Insurance Is Actually Needed?
If someone believes that a board of directors for a company took an improper or inappropriate action, they may file a claim. The most common lawsuit type would be one that alleged the board of directors allowed the improper termination of a worker.
Insurance for this type of claim will usually be found in the D&O policy.
Usually, D&O claims are employment-related. This includes things like wrongful termination, discrimination, or harassment.
If an organization doesn’t have any employees, the risk of a claim being filed against a board member is low. This means the premium for coverage is, as well. It makes sense to purchase this, if for no other reason than just to provide the board members with peace of mind.
Usually, D&O insurance provides protection for individual board members and employees, volunteers, and even the organization if a civil suit is filed. However, since every policy is unique, some have different features. This means you must confirm with your broker that the organization and individual are fully covered.
With all this in mind, the actual amount needed varies. This is determined by the organization and its needs.
What Is the Cost of D&O Insurance?
If your organization doesn’t have any employees, you can purchase $1 million in D&O limits for approximately $600 each year. If your organization has employees, you can pay around $1,200 for those with just a few employees to around $4K to $5K for up to 50 employees.
The actual cost of this coverage will vary greatly based on the insurer you choose, the breadth of the coverage required, past claims, and the quality of the employment practices used within your organization. Keep in mind, D&O coverage provides covers for both the legal expenses of defending your nonprofit and the settlements that may arise.
It's also important to remember that D&O can’t cover board members for their responsibility for retirement payments and payroll taxes that were withheld from the employee’s paychecks but never submitted to the appropriate institutions.
D&O Insurance Will Help Your Nonprofit Organization Attract New, Quality Talent
When you secure D&O insurance for your nonprofit organization, you are signaling that your directors and your officers are fully protected. This will help attract top talent that may decline the position if they believe that their personal assets would be at risk.
A business with an advisory committee or board of directors can benefit from a D&O insurance policy. It is a good idea to talk to the professionals to know for sure.
Now You Know the Importance and Costs Related to Directors and Officers Insurance
Running a nonprofit organization is something that requires a lot of time and effort. Unfortunately, the insurance needs of the nonprofit may be overlooked significantly.
One type of insurance that you should not overlook is directors' and officers' insurance. If you are ready to learn more about this insurance coverage or any other coverage that your nonprofit organization needs, contact us.
We have been working in the insurance business for years and will provide you with the coverage you need for a price that fits with your organization’s budget.