Why is directors and officers insurance important? Alternative Insurance Agency has the answer for you!

Why is directors and officers insurance important?

So why is D&O insurance such a big deal and often a big budget item for any organization? The quick and simple answer is that it protects your volunteer board members and their families. This insurance policy is so important most especially when a potential lawsuit comes up against your beloved charity.

This type of policy is necessary to manage risks, whether from physical damage and injuries or from financial losses as well as to protect the personal assets of members of their leadership teams from lawsuits. So, a premium payment may seem like a big expense but if your charity is alleged in any wrongful acts – your board members can be personally sued. Therefore D & O is so important for your building a strong charity board that members feel safe and comfortable volunteering for.

Directors and Officers InsuranceWhat does D&O insurance cover?

D&O insurance specifically protects directors and officers of a non-profit or even a for-profit organization from certain kinds of personal liability arising from their official roles. A typical general liability policy only covers the church or whatever corporate entity that been established and most importantly its leadership in the event of things like a personal injury or property damage. It often does not capture the specialized forms of liability that can arise for individuals in leadership positions.

The key benefit of D&O insurance is that it will cover legal fees for a director or officer who is sued for the types of claim that are covered. Do you want a few examples of issues that could trigger coverage under a D&O insurance policy? Here are a few to review:

  • Failure to provide adequate financial oversight.
  • Use of donor funds in a manner inconsistent with donor wishes.
  • Entering into any transaction that risk the church or non-profit’s tax-exempt status

But does my charity or church need Directors and Officers Insurance?

State law varies from state to state on the limits the personal liability of directors and officers of religious and secular nonprofit organizations. You would think at in theory, this should prevent many lawsuits against a church or charity’s director or officer from ever being filed. But you might want to think again in our modern-day society, if a person even thinks you have a lot of money they are going to sue. Some people view lawsuits as tactical instruments meant to squeeze quick settlements out of people and/or organizations who lack resources to defend themselves. Even if a lawsuit has no merit, it can cost a hefty sum to defend.

Therefore, as your non-profit, for-profit or church ministry grows – so does the potential liability of its directors and officers. Most professional minded, wealthy, and/or sophisticated people who understand the legal risks may want the organization to carry D&O insurance as a condition of their service. Furthermore, regardless of the organization’s size and board experience, all nonprofit organizations need to purchase D&O insurance protection because it is the right thing to do.

Now if a person wishes to volunteer and serve without this coverage, it may be desirable for your organization to have them sign an agreement not to sue your or your organization is a lawsuit is made against them during their term of service. It is better and wiser to carry a D&O insurance policy anyway to protect its key personnel from undue unforeseen hardships.

Remember, a Directors and Officers insurance policy can offer coverage for:

  • defense costs
  • settlements
  • judgments arising from lawsuits
  • wrongful allegations brought against the nonprofit and/or its board member(s)

directors and officers insuranceWhat is the Importance of Directors and Officers Insurance for Nonprofit Boards?

It is a ignorant to feel that only large nonprofit organizations and mega-churches need D&O insurance. The directors and officers of any sized nonprofit organization have meaningful exposure to personal liability even those just starting up. Did you know that close to 20% of all U.S. corporations are nonprofits. Thus, lawyers know this and are interested targeting this group. A good example is the Boy Scouts that had to file bankruptcy because of all the lawsuits. If such a well-established and respected by many can fall – so can you. The liability for directors and officers of small corporations is at least as high as that of for-profit corporations.

Recruiting volunteers to be on your board is tough but training them is tougher. The lack of experience and lack sufficient knowledge of a board member’s legal duties and responsibilities regarding the nonprofit they serve is real. You need to train them well on day one to avoid arguments of premium costs down the road.

Sometimes, directors and officers of nonprofit organizations who do have business knowledge or business experience a lot of times fail to bring that to the charity. They feel differently and think differently sometimes illogically unfortunately. They wish to run the charity in less formal or ‘feel good’ way. By training all the board members annually not to fail to take the same business approaches to decision-making as they would when working for a for-profit corporation will ensure your charity has a bright future.

It’s critical for nonprofit board directors and officers of all types and sizes of nonprofit organizations to understand that not all of their actions are covered by the federal Volunteer Protection Act. Charity boards that fail to protect their organizations with a D&O insurance policy may find that the cost of just one claim is far larger than the cost of any insurance premiums they would have paid, if they had purchased a D&O insurance policy.

Why Nonprofit Organizations Need D&O Insurance More Than For-Profit Corporations?

It is all to common for nonprofit organizations to recruit board directors who have the passion for the cause, yet who don’t have any experience serving as board directors. For this reason, the general duties and responsibilities of running an organization are less familiar to nonprofit board directors than to directors of for-profit corporations. The lack of direct experience, time availability, and familiarity with business practices often means that nonprofits operate less efficiently than their for-profit counterparts. The lack of understanding about good governance methods and practices along with sound decision-making creates a greater risk of claims against nonprofit organizations than against for-profit corporations. These are valid reasons that all nonprofits should purchase D&O insurance protection as soon as possible.

According to a recent survey by the Insurance Information Institute, 31% of companies that had a D&O claim against them within the previous five years, the majority were nonprofit organizations, which accounted for about 58%.

If reading any of this concerned you and you want to schedule an appointment with us… Feel free to 386-575-2300.

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