Not For Profit Directors and Officers Insurance Explained

Not For Profit Directors and Officers Insurance Explained

In today’s climate of transparency and accountability, an organization’s officers and directors face a myriad of exposures. Regulatory mandates, stakeholder & donor activism mean directors are more frequently at risk, translating to rising claims and escalating settlement costs.

In the wake of unprecedented scandals in recent years, clearly the trend of  accountability applies to all organizations. Not for profits, are not exempt from litigation arising out of the management decisions of their boards.

Not for profit organizations provide essential social services that benefit communities and their members. These organizations cannot survive without a solid volunteer Board of Directors assigned to elect officers, adopt policies and make major financial decisions for the organization. Although the members of the board are volunteers, there is a certain amount of risk involved in holding one of these positions. Specifically, even when acting in good faith, board members are subject to potential personal liability, which may affect their personal financial status because of their decisions.

Not For Profit Directors & Officers Insurance Risk and Responsibility

To combat the chance of affecting the personal liability of board members, directors and officers of not for profit organizations should assess the risks involved with holding these positions. Organizations are encouraged to first develop a volunteer risk management committee to identify all risks and pose solutions to minimize potential harm. In addition, you need to ensure that the not for profit organizations board members understand their governance responsibilities. Each not for profit should do their best to educate its board on their legal duties, fiduciary duties and decision-making roles. Furthermore, the risk committee should ensure the following:

• The organization is working within its stated mission
• Funds are spent according to the mission, and spending decisions are known to donors
• The organization does not accept donations with conditions
• Individuals with potentially conflicting personal agendas are not allowed to sit on the board
• Board members are not using professional contacts in dealings with the not for profit

Not For Profit Directors & Officers Insurance Fills The Coverage Gap

Unlike a commercial general liability policy that provides coverage for claims arising from property damage and bodily injury, a Not for profit Directors and Officers Insurance policy specifically provides coverage for a “wrongful act,” such as an actual or alleged error, omission, misleading statement, neglect or breach of duty.

A Not for Profit Directors and Officers Insurance policy provides defence costs and indemnity coverage to the entity listed on the policy declarations, which may include:

• Coverage for individual directors and officers;
• Reimbursement to the organization for a contractual obligation to indemnify directors and officers that serve on the board; and
• Protection for the organization or entity itself.

Indemnification provisions are typically included in the charter/bylaws of a corporation. While an important risk component not for profit organizations often do not have the financial resources to fund the indemnity provisions, making the bylaws hollow. A Directors and Officers Insurance policy can provide an extra blanket of security in the event of a covered loss.

In addition, some Not for profit Directors and Officers Insurance polices can be endorsed to provide employment practices liability (EPL) coverage and/or fiduciary liability.

To learn more about not for profit directors and officers insurance connect with an ALIGNED Insurance Advocate at www.alignedinsuranceinc.com