Does my nonprofit need D&O liability insurance?

nonprofit insurance

Nonprofits strive to make the world a better place. They’re committed to helping people and making a difference. Lately Atlanta has become a real hub for the nonprofit sector. Georgia itself has 16 nonprofits ranked in the top 400 nationally. Five of those nonprofits (all located in the metro Atlanta area) are in the top twenty. Some well-known, powerhouse nonprofits like The Boys and Girls Clubs of America, The American Cancer Society, and CARE have their headquarters in Atlanta. That’s quite an accomplishment.

While the mission of the nonprofit is to make some sort of difference, there are times when things might get off-track. People bring lawsuits against nonprofits for a variety of reasons, and the truth of the matter is that nonprofits don’t always have the money to defend themselves in these situations. Besides, lawsuits can come from anywhere—shareholders, employees, competitors, regulatory bodies, other corporations. But there’s good news: you can invest in D&O liability insurance for your nonprofit organization.

What’s D&O insurance?

D&O stands for Directors and Officers Insurance. Any company, public, private, or nonprofit, can purchase it. The point of D&O insurance is to cover the cost of defending a director or officer of an organization’s board if they have charges brought against them.

D&O insurance gives you coverage for things like errors and omissions, misleading statements, neglect, or breach of duty. Sometimes miscommunications and accidents happen. When they do, D&O takes care of the defense costs and indemnity coverage for the party who’s specified on the policy.

What does D&O do?

When a D&O policy is written, there are usually three parts, or branches. These branches show the insurer’s promise to cover the insured, and they also specify the amount of coverage the organization has.

Think of D&O like a triangle. It has three parts to it, and these parts are known as sides. The three sides that make up the D&O policy are:

  • Side A (D&O Liability Coverage)—This piece of the D&O triangle protects individual directors or officers against losses. Usually a nonprofit will protect their director in the case of a legal mishap—sometimes this is written into the organization’s bylaws—but sometimes they don’t have the funds to cover the costs of doing so. In that case, the director would be in a bit of a pickle, as their personal assets would be at risk. To get to the point, Side A protects the personal assets of the directors and officers. A lot of the time people won’t join boards of nonprofits unless they have D&O coverage, so Side A goes a long way in drawing qualified people to work for the organization.
  • Side B (Corporate Reimbursement Coverage)—Side B of D&O reimburses the nonprofit or organization for the expenses of legally defending its director. These expenses can quickly overwhelm any company, so this part of the puzzle is important.
  • Side C (Entity Coverage)—This section of D&O protects the nonprofit itself. Sometimes the organization is pulled into the mess along with the director if someone brings charges against the entire organization. If that were to happen, Side C would protect the nonprofit’s assets and cover the cost of legal defense.

What’s excluded from a D&O policy?

It’s extremely important to look at your policy closely. Study it with a magnifying glass. Not all D&O policies are the same, and they all might have different exclusions tucked away within the pages of fine print. You really need to understand your exclusions and clarify and questions that you might have.

Here are some of the common exclusions that you might find in a D&O insurance policy:

Exclusions relating to the time of the offense…

  • Known circumstances: Insurance won’t cover a claim about an incident that happened before the beginning of the D&O policy. Typically the premium will not be refunded to the company.
  • Rescission: There’s a section of the insurance application called the Warranty Questions, and these ask if the insured are aware of any situation that could lead to a claim. The carrier will void the policy if they find out that the insured falsified information on their application, although they will usually give the premium back.  
  • Prior acts: This states that the insurer is not responsible for protecting the insured against any wrongful acts that occurred or were attempted before the coverage began.

Exclusions relating to duty to defend…

The insurer might have what’s called right to duty to defend. This gives them the right to choose the insured’s defense and that they have more say in the legal fees and payment method.  

  • Reasonableness of defense: The insurer is only responsible for paying legal fees that are deemed reasonable and necessary.
  • Consent to settle: This means that the insured has to have written permission from the insurer before they settle a claim.
  • Hammer clause: Sometimes the insured wants to keep fighting even though the insurance company has called it quits. If the insured decides to disregard the insurer’s request to settle, the hammer clause means that they’re pretty much on their own.

Exclusions relating to other coverages…

  • “Other insurance”: The D&O insurance policy assumes that the organization has more coverages than just D&O. They may exclude claims that would be covered under a different form of insurance. This is where it becomes really important to be upfront with your agent about what kind of coverage you have and what coverages you don’t.
  • Contractual liability: Policies don’t have to cover claims that relate to a contract between the organization and another party because the contract was entered voluntarily.

Exclusions relating to deliberate actions on part of the director…

  • Conduct exclusions: The insurer does not have to cover claims dealing with allegations of fraudulent or criminal behavior or defend against claims of illegal profits.  

Insured vs. insured exclusion…

  • Insured vs. insured: Insurance claims get messy when one insured party goes after another—for instance if one director who’s insured picks a fight with another director who’s insured. Normally insurance companies like to keep their noses out of office politics. However, if one of the directors was a whistleblower of the allegation, they’ll most likely cover it.

Atlanta is a major center for nonprofits. The city houses many charitable organizations that strive to make a difference. Unfortunately, the good intentions of nonprofits don’t make an organization exempt from a killer lawsuit. That’s why nonprofits need to consider D&O insurance. When looking into getting a D&O policy, it’s important that your agent is highly knowledgeable about D&O and that the insurance company has the financial capability to protect you.

AtlantaInsurance.com has plenty of experience with insuring nonprofits, and we’d love to get to know you and your organization. We can help you identify your risks and find the coverage you need, and we can even provide you with a free quote.

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