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Why Do Nonprofits Need D&O Insurance?

Running a nonprofit can be extremely rewarding. You get to help, educate, or provide resources to those in need. All profits are rolled back into your cause. Since you’re essentially a charitable organization, you should be free from worry over litigation. Right? Wrong! 

What is D&O insurance?

Directors & officers insurance is a type of liability insurance, similar to errors & omissions insurance. But whereas E&O insurance protects employees against lawsuits stemming from mistakes they made or things they neglected to do, D&O insurance protects executives from lawsuits so they can focus on leading their companies without fear of personal financial loss. D&O insurance will pay to defend the company or the leadership against claims that it acted inappropriately. 

>>MORE: The Best E&O Insurance Companies

Who needs D&O insurance?

Anyone responsible for the leadership and vision of a company, including:

  • Executives
  • Directors
  • Presidents
  • Vice Presidents
  • Board members

Anyone in a leadership position is seen as the face of the company, and therefore carries a risk of lawsuits. 

>>MORE: Why Do Startups and Small Businesses Need D&O Insurance?

Why nonprofits need D&O insurance

You wouldn’t think nonprofits would get sued, but it happens all the time. The three most common lawsuits against nonprofits are:

  1. Contract disputes
  2. Employment claims
  3. Personal injuries

Directors and officers can make major decisions about how a nonprofit is run and what its goals are and determine how the money is spent. Not everyone will be happy with these decisions. 

Nonprofits especially need D&O insurance because often, these executives take on running the nonprofit because they have passion for the cause. They don’t necessarily have a great deal of management experience. This can mean that nonprofits run less smoothly than other corporate entities. They may be more prone to making mistakes due to lack of experience. Many executives of nonprofits don’t realize that if they don’t have D&O insurance, their personal finances could be at risk. 

According to the Insurance Information Institute, out of the 31% of companies that had a D&O claim against them in the past five years, 58% of those were nonprofits. 

>>MORE: Nonprofit Insurance: What It Is, What It Covers, Cost, & Providers

What does D&O insurance cover?

D&O insurance protects managers and officers from lawsuits. Lawsuits can be filed against any company. For example, say you, as the director of a nonprofit, hire a marketing manager. They turn out to be disastrous, so you let them go. They sue you for wrongful termination and claim the work environment was hostile. D&O insurance will represent the officers and the nonprofit in the lawsuit so no one has to cover those expenses personally. 

There are three elements to a D&O policy, known as side A, side B and side C. 

  • Side A: Covers executives when the company is unable or refuses to provide indemnification. 
  • Side B: Covers companies that indemnify directors and officers. The company is reimbursed for defense costs and lawyers’ fees. 
  • Side C: Covers the company, or nonprofit, itself. If a company is being sued for mismanagement, the D&O policy protects the company. 

What doesn’t it cover?

D&O insurance does not protect you from everything. The following are excluded:

  • Fraud
  • Personal profits
  • Bodily injury
  • Pending and prior litigation
  • Lawsuits between directors and officers within the same company

Regarding the bodily injury, you may have noticed that nonprofits do get sued over bodily injuries. This is why you also need a general liability policy. 

How much does D&O insurance cost?

The average cost of a $1,000,000 D&O policy is between $5,000 and $10,000 a year for companies with revenue below $50 million a year. 

Naturally, there are a number of factors affecting how much you’ll pay for D&O insurance. 

  • Claims history
  • Assets
  • Debt
  • Amount of revenue
  • Industry
  • Size of company

Nonprofits that have been around for a long time and have a clean record of D&O claims usually pay less for D&O insurance. 

If you want to get a good quote for your D&O policy, be sure to shop around with a few companies or with a digital broker like CoverWallet so that you can compare several quotes to select the cheapest one:

How Can I Save Money on D&O insurance?

To save money on D&O insurance, the most effective thing you can do is manage risks effectively. To do this, you need to monitor and standardize employment practices. The most common reason and most expensive lawsuits against nonprofits are employment related. These include:

  • Harassment
  • Discrimination
  • Wrongful termination
  • Retaliation
  • Wage disputes

To avoid such lawsuits, make sure every employee is held to the same standards, and spell out those standards in employee handbooks. There should also be detailed policies on hiring and firing employees. Even though you are not in this business for the money, you still need to run your nonprofit like a corporation. 

Other things you can do to save money:

  • Bundle D&O insurance with EPLI (Employment practices liability insurance)
  • Pay your entire premium upfront and in full
  • Don’t get more insurance than you need
  • Raise your deductible

Should my nonprofit get D&O insurance?

Yes, absolutely. You’ll attract stronger candidates for executive positions if they know they are protected by D&O insurance, and their personal finances are not at risk. You’ll can also attract investors more easily, since many of them will want to protect these investments. Should your nonprofit file for bankruptcy, the directors and officers will be protected, even after the nonprofit folds. 

These days, cyber-attacks are more frequent and more destructive. Hopefully, you have cyber insurance as well. But, if a case could be made that management didn’t do all they could to protect the company from hackers, they could be held responsible for cyber security breaches—another reason why you need D&O insurance.  

Money is often tight at nonprofits. You want all the money to go to the cause you support. However, it is imperative that you protect yourself and your management team with D&O insurance. 

Which other business insurance coverages should nonprofits get?

Depending on the size of the nonprofit measured by the annual budget or the number of employees, the field the nonprofit operates in, and the nature of nonprofit work, etc. nonprofit organizations should consider other business insurance coverages such as workers comp insurance, general liability insurance, professional liability insurance, commercial property insurance, business owners policy (BOP), and cyber insurance.

Learn more the details at nonprofit insurance: what it is, what it covers, & cost; and the best nonprofit insurance companies.

The best D&O Insurance companies for nonprofits

The good news is that D&O is a popular business insurance coverage. Many insurance companies offers it. We research more than 20 providers and recommend the top 5 for your consideration: CoverWallet, FounderShield, Dumont, HUB International, Travelers, and AIG.

Learn more about these companies in the best D&O insurance companies article.

D&O insurance vs. E&O insurance: How are they different?

D&O insurance covers the directors and officers of an organization against claims and law suits believing that they are negligent in their duties as directors and officers of the organization. On the other hand, E&O insurance protects employees of an organization against claims and law suits believing that they are negligent in their acts and performance of duties resulting in errors and omissions.

They are both important. If your business provides services to customers, you need to make sure to have E&O insurance to protect your business and your employees from E&O claims and law suits. If you business or organization is big enough to have directors and officers, you need to have D&O insurance to protect them from law suits arising from duties as director and officers of the organization.

D&O insurance vs. professional indemnity insurance: How are they different?

Professional indemnity insurance, or more commonly referred to as professional liability insurance, covers claims against all professionals believing that they are negligent in the performance of their duties resulting in bodily injuries or property damages. On the other hand, D&O insurance protects the personal assets of directors and officers in claims relating to their actions and decisions while working for the board or the organization. D&O insurance doesn’t cover bodily injuries and property damages.

Last thoughts

The words “nonprofit” sometimes imply a more relaxed, friendly place to work. However, you still need to spell out all policies, especially those affecting employees, to avoid lawsuits. You don’t want an ill-thought out decision or a bitter ex-employee to derail everything your nonprofit stands for. 

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