No good deed goes unpunished, or so the saying goes. For those serving as directors or officers on a nonprofit board in our litigious society, the saying might not be much of an exaggeration.
In fact, nonprofit board members assume a degree of responsibility for their organization’s operations, which potentially can entail personal liability for their own actions or inactions and those of the people they oversee.
CONSIDER SOME SAMPLE SCENARIOS:
• A finance or investment committee makes what turn out to be unwise decisions, and the nonprofit suffers a large financial loss that impairs its ability to perform its mission. Parties who benefited from the nonprofit’s work then file suit alleging a breach of fiduciary duty to properly manage the assets of the institution.
63 percent of survey participants serving on nonprofit boards in some capacity had had a claim made against them in the past ten years.
• An employee of the nonprofit is terminated. He or she then alleges sexual harassment, wrongful termination and an unsafe work environment. The board is subsequently sued for negligent supervision for allowing both the unsafe work environment and alleged wrongful termination to occur.
• Officers of a country club fail to exercise a rent-free lease option on the club’s land and are sued by members when their fees are substantially increased.
Such scenarios are hardly rare: A recent study by Privilege Underwriters Reciprocal Exchange (PURE) found that 63 percent of survey participants serving on nonprofit boards in some capacity had had a claim made against them in the past ten years. Among such claims, employment-practice claims are by far the most frequent and, generally, most costly.
Given this reality, whether you serve on a board for a charity, a co-op, a historic home, museum or social cause, it’s important to understand how much protection your institution buys to cover its directors and officers (D&O insurance), and what deductible level comes with the coverage.
D&O insurance protects against actual or alleged wrongful acts in three major areas: governance liability, fiduciary liability and employment-practice liability. Typically, nonprofits carry $1 million in claims-coverage limits for these types of policies.
While you might think this coverage would be a given at any well-run nonprofit, circumstances change, and fine print matters.
When the economy goes south, for example, nonprofit budgets get tight and insurance is sometimes targeted for tightening. Dropping D&O coverage entirely is certainly the worst-case scenario. And lowering limits to trim insurance costs is another undesirable scenario, as it presents its own drawbacks; trimming reduces premiums but potentially exposes directors and officers should a claim exceed the lowered policy coverage.
Worse, economic downturns and tight budgets tend to cause lay-offs at nonprofits, often triggering spikes in employment-practice claims—things like wrongful termination, sexual harassment or an unsafe work environment.
For those concerned about D&O coverage limits at the nonprofit they’re helping, a way to stay protected is still possible. A number of insurers serving the needs of successful families and individuals offer “excess D&O” coverage; essentially, this is a policy specifically designed to cover individuals in situations where a claim exceeds the nonprofit’s coverage limit.
While a great option, excess D&O still carries some important caveats and considerations of which you should be aware; and you should probably consider getting some expert advice before shopping around yourself. For instance, each carrier has a specific definition of what constitutes an eligible nonprofit—usually hospitals and higher education boards are not eligible—and each carrier’s coverage structure has its own unique requirements.
So, while the best solution is certainly for your organization to have its own solid D&O coverage, should that not be the case at your nonprofit, make it your mission to check into an excess endorsement, because good deeds are definitely worth doing.
This article was originally published in the October/November 2016 issue of Worth.
