It may come as a surprise that Not-for-Profits are subject to legal claims more than twice as much as private institutions. As the Not-for-Profit’s board of directors are responsible for setting organizational polices, individual board members may be held financially responsible when a claim is brought against the organization.
Here are some thoughtful statistics*:
- In any claims event, which includes lawsuits and business interruption losses, most
claims lead to at least $10,000 in losses.
- Almost 50 percent of events can potentially lead to over $1 million in losses.
- One percent of cases producing losses of up to $100 million.
Given this risk, why would anyone want to volunteer to serve on a board at all?
Not-for-Profits mitigate this risk to their board members and to the organization’s financial well being by purchasing Directors and Officers Liability Coverage (D&O). A D&O policy covers claims that stem from “willful acts” (i.e., those that are made as a matter of policy) such as wrongful termination, misuse of funds, age discrimination and breach of contract. These types of claims are not covered under a general liability policy, which only covers damage to third-party property.
Choosing a D&O policy with the right coverages is essential. Agents can help their clients to make informed choices by explaining the coverages and by clarifying what is included/excluded. Further, they should help them to tailor their policies by recommending additions that will suit their organizations’ particular needs.
Here are the elements that a good D&O policy should include:
- Coverage for claims made against the organization its directors, officers, managers,
full time, part-time and leased employees and its volunteers.
- Employment practices liability coverage to protect the organization against suits from
its employees, volunteers or clients.
- Coverages including fiduciary, privacy, crime, kidnap and ransom, miscellaneous E&O
and technology E&O.
- Reinstatement of limit for individuals for subsequent claims.
- Waiver of deductible or at least an explanation of the deductible.
- Coverage for crisis management to hire a public relations firm.
Crisis management coverage is especially important. Given today’s ever present and contentious social media environment, accusations, rumors or maliciously released information can quickly go viral. The ability to respond quickly, robustly and with confidence is essential to mitigating the damage to an organization’s reputation and finances.
Another consideration is whether the insurer provides free or subsidized employment practices assistance. This is a valuable service to help the client understand the risks of hiring, progressive discipline and firing. Another question to ask is whether costs for defense are paid by the insurer as they are incurred, or if the insured is expected to pay them out of pocket and apply for reimbursement.
By the way, it’s not just larger Not-for-Profits like colleges and universities or cultural institutions that need the coverage. Smaller organizations such as community organizations and clubs are subject to costly D&O claims.
To illustrate this, consider an instance where members of a country club sued the organization, alleging that the directors and officers failed to renew an option to extend the lease of land used as a golf course. As a result, the lessor required the club to either purchase the land for more than $10 million or to lease the land for a substantial price. The suit was settled for $2 million.
Even organizations that have boards but no employees should seriously consider getting D&O. For example, the board of a local chapter of a professional organization could be held responsible should its treasurer embezzle funds. The board would need to pay for a legal defense should a suit be brought, regardless of the truth and accuracy of the claim.
Not-for-Profits often have to make painful choices with regard to where they allocate scarce operational funds. Yet for many organizations, saving money by cutting back on D&O coverage can be a risk not worth the reward. By saving a money in the short term, they can leave themselves open to potentially crippling losses should they have to defend against a lawsuit. Managers should consider their D&O policies very carefully. Their organizations’ financial security can depend on it.