Insurance for Directors and Officers of Family Run Nonprofit
Questions Every Nonprofit Manager Should Ask About Directors and Officers Insurance
In our recent Family Office Benchmarking Written report 2021, we found that only xi% of family office clients, who are often involved in many directorship roles, carried private managing director'southward coverage, indicating an area in demand of education and protection.
The below blog originally appeared on NACD BoardTalk on Apr 6, 2021. Used with permission.
Directors who sit down on the boards of public companies or big private corporations frequently ask the organizations questions about directors and officers (D&O) liability insurance coverage, indemnification, and internal controls prior to agreeing to serve on these boards. Just even sophisticated individuals sometimes featherbed such questions when invited to join the board of a nonprofit organisation. This can be a costly mistake.
Nonprofits do much good, from raising awareness of social and environmental issues to supporting charitable endeavors that improve lives and communities. And many successful businesspeople and donors generously support these organizations by giving their time and talent to nonprofit boards. Nonetheless, the reality is that nonprofits of all sizes, and in all sectors, can be litigation targets. It is not uncommon for directors and officers at nonprofits to face allegations of fraud, wrongdoing, or liability for employment do issues—all of which accept go more common during the pandemic. For example, according to Insurance Concern America, a major liability exposure for nonprofits is the mismanagement of funds. As a outcome of COVID-19, numerous nonprofit organizations have had to shut, suspend fundraising, lay off or furlough staff, or reduce services. Managing these challenges improperly can issue in lawsuits.
I recently received a call from a nonprofit board appointee who asked how they could extricate themselves from a difficult state of affairs. The caller shared that later on publicly accepting a seat on a nonprofit board, they learned that in that location were potential allegations of fraud against the treasurer and allegations of mismanagement against other lath members. Ironically, one of the people who recruited this board appointee was under investigation. The board member was very upset and concerned about potential impacts to their reputation and personal financials. Clearly, this was the incorrect time to be learning about and discussing this situation. Conducting due diligence before joining a board is imperative.
Questions to Consider
Managing liability risk is a two-way street for organizations and those they invite to serve on their boards of directors. Individuals can experience more comfy participating as directors when they are less worried about exposure to lawsuits and nonprofits benefit from the experience and insights that directors can bring when the directors are confident in their controlling.
Nonprofit organizations tend to have less rigor and structure around risk management than individual businesses and they do non have the reporting requirements of public companies. Therefore, every individual asked to participate on a nonprofit board should enhance certain questions:
Does this nonprofit organization have a D&O policy? Nonprofits normally purchase D&O liability insurance, but it is critical to understand the quality of the coverage. The D&O policy can be written very broadly to better protect board members, or information technology tin can be written with coverage restrictions. Information technology is of import to accept an experienced insurance professional review the coverage in an endeavor to best protect the individual managing director equally well every bit the organization. That said, in that location are differing types of D&O insurance policies. For example, a Side A policy, which offers coverage solely for the directors and officers, typically sits above a traditional D&O policy and would not provide coverage for suits against an system itself. Information technology is imperative to understand the policy construction, full amount of coverage, and how the insurance volition reply to lawsuits.
What are the policy limits? Smaller organizations might opt for a minimal level of coverage limits, such as $ane one thousand thousand. At face up value, that might seem high relative to a nonprofit'southward avails. In reality, $1 million today is non a lot of protection for high-net-worth directors. Even in a seemingly frivolous accusation, defense costs tin can add together upward quickly to hundreds of thousands of dollars. It is too of import to understand that the limit is typically shared between the entity and the individual directors and officers. All of these factors can serve to erode policy limits quickly.
What other risks does the nonprofit have that might share those limits? An advantage of D&O insurance for nonprofit and private organizations is that the coverage is typically very broad. It tin answer to a multifariousness of claims, from fiscal losses to employment practice allegations to 3rd-party liability arising from alleged wrongful acts by management. While the broadness is oft benign, it tin be a negative too, equally the policy gain defend even fraudulent actors until last adjudication, making it important to understand who may be eligible for coverage under the policy and when that coverage may cease.
What is the take chances profile of the nonprofit organization? For directors, a clear picture show of the nonprofit's operations and take a chance contour is important. Boards are by and large viewed as the ultimate run a risk owners for the organization and private directors tin make more informed decisions about D&O insurance and indemnification agreements if they ameliorate sympathize potential risks. They must also work to understand the hazard-management safeguards in identify to protect them as directors and officers outside of the insurance policy. The insurance policy should be a backstop while sound board practices should be the foundation of managing director and organizational protections.
What does the nonprofit'due south balance canvas expect like? An organization'southward bylaws may grant a managing director or officeholder defence force and indemnity for declared wrongful acts committed in their role as a board member. In the absence of a D&O policy, this protection comes from the organization's rest sail. The D&O policy provides fiscal bankroll to the balance sheet for this obligation, and it also protects directors and officers in many cases where the organization is legally barred from doing so. Where a nonprofit's balance sheet is weak, adequate D&O coverage becomes more of import.
Take a chance Direction Tips
Before committing to join a nonprofit lath, potential directors should follow the below tips to amend sympathize and manage the risk that condign a board fellow member entails.
Seek transparency. The more information a director has about a nonprofit arrangement—its balance sheet, operations, take a chance-direction program, and more than—the better that director can perform their office and the more than effective that managing director can exist in mitigating risk, both for the organization and themselves.
Gather insurance details.If a nonprofit has insurance in identify for its directors and officers, obtain a copy of the policy along with any related documents, such as indemnification agreements.
Obtain expert advice. If there are whatever questions about the D&O coverage, its capability, or how information technology might respond to different claim scenarios, directors should hash out those problems with their legal and risk advisors.
Explore alternative risk-transfer options. Directors who worry about personal liability arising from their nonprofit board membership have options further to any D&O coverage the nonprofit may have. Personal insurance policies, such as homeowner and umbrella policies, typically exclude commercial ventures and for-profit board activities. Even so, at that place are personal director liability policies that can provide additional coverage specific to an individual nonprofit board member and are designed to sit above the corporate D&O policy.
Given the rising frequency of lawsuits and settlement amounts, it is important to have fourth dimension to consider your risks as a nonprofit director and review your options with an experienced risk advisor.
Source: https://pcs.marsh.com/us/insights/blogs/questions-every-nonprofit-director-should-ask.html
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