Non-profits file D&O claims twice as much as for-profits. Learn more about this growing risk and D&O coverage specifically designed to meet the needs of non-profits.
Why D&O Policies are Vital for Non-Profit Organizations
Running one of the 1.5 million non-profit organizations in the United States is a fulfilling and meaningful experience. It also brings significant risks and loss exposures. Every year, non-profit leaders are exposed to Directors and Officers (D&O) claims made against them and the organizations they manage.
With D&O lawsuits on the rise, more and more non-profit organizations are turning to insurance solutions and obtaining Directors and Officers Liability coverage as part of a Management Liability policy.
At Paperless Insurance Services, we have an extensive background in providing coverage for non-profits.
Understanding Management Liability Insurance
Management Liability insurance policies, which include Directors and Officers Liability (D&O), are insurance products that cover exposures that directors, officers, and for-profit and non-profit entities may face. According to the International Risk Management Institute, Management Liability policies can include coverage for:
- Directors and Officers Liability
Directors and Officers Liability (D&O) insurance is an insurance product for people serving as board directors and/or officers in an organization. In practice, this insurance policy serves as a kind of errors and omissions policy for individual officers, protecting their personal liability from claims made against them that result from their managerial decisions.
- Employment Practices Liability
Employment Practices Liability (EPL) insurance covers claims alleging “wrongful acts” related to employment. Among the most common claims are wrongful termination, sexual harassment, and retaliation. Although this coverage can be sold as a stand-alone product, it is often included as part of a broader Management Liability policy.
- Fiduciary Liability
Fiduciary Liability covers an employer’s exposure related to the management of employee benefit programs. Due to the Employee Retirement Income Security Act (ERISA) of 1974, employers can be held personally liable for mismanaging employee benefit plans. Fiduciary Liability protects against these claims.
Each of these coverages comprises Management Liability policies designed for any entity with a board of directors or officers.
D&O Risks to Non-Profits
In an increasingly litigious society, non-profit directors are at significant risk for a lawsuit. According to a Willis Towers Watson D&O Liability Survey, during a ten-year period, 63% of non-profit organizations in the U.S. have reported a D&O claim. With two million non-profit board seats filled every year and D&O lawsuits on the rise, this number is only expected to grow.
Claims and litigation for non-profit organizations
There are several different types of claims and litigation issues that may fall under the D&O umbrella. Among the most common D&O claims for the non-profit sector are:
- Misappropriation of funds
- Regulatory investigations
While lawsuits may come from outside the organization, many originate from an internal dispute. According to a report from Insurance Journal, 85% of claims filed against non-profit organizations are employment-related. This includes hiring practices, firing practices, and discrimination, among other things.
Who can sue non-profit organizations?
Non-profit directors are under significant legal scrutiny. The applicable legal standards for non-profit directors and officers are as high as, if not higher than, the standards with respect to for-profit executives. Because of the fiduciary and legal responsibilities these directors and officers have for multiple constituencies, there are several parties that can file against them as claimants in a lawsuit:
Donors and contributors to a non-profit may bring a lawsuit against the organization, often citing misappropriation of a restricted donation.
The recipients of the work a non-profit does can bring legal action against the directors and officers of the organization and allege wrongdoing.
- Regulatory Bodies
Claims against non-profit organizations can be brought by state attorneys general in most jurisdictions. At the federal level, government officials from entities such as the Internal Revenue Service or the Department of Labor can bring legal action.
If the non-profit organization in question is operating as a membership organization, it is vulnerable to claims being filed by members alleging harmful acts with respect to the interests of the members.
- Third party affiliates
Vendors, fundraisers, or other non-profit organizations that have a relationship with the organization in question can allege harm and bring forward a lawsuit.
Staff members (both current and former) of non-profits can bring legal action against their organization for alleged wrongful acts including discrimination, wrongful termination, Americans with Disabilities Act (ADA) violations, and sexual harassment.
D&O costs to non-profit organizations
The costs associated with D&O-related legal action are often much higher than a non-profit can afford. Typical D&O claims can easily reach six figures. The majority of these costs are legal defense costs. Even if the director, officer, or organization is cleared of any wrongdoing, the defense costs alone can be high enough to put the non-profit out of business. In the case of an adverse judgment, the cost to a director or organization can be much higher, as indemnity payments can push the total costs well above $500,000. If a non-profit organization does not have a D&O policy in place, these costs may have to be paid out of pocket.
Non-Profit D&O Claims Scenarios
Non-profit organizations file D&O claims twice as much as private companies do, according to Willis Towers Watson. For this reason, it’s helpful for non-profit leaders to understand the types of scenarios that lead to a claim as well as the associated costs. At PHLY, we have decades of experience handling D&O claims for the non-profit space. Below are some claims examples with costs to the organization that would be covered by a D&O policy.
Misappropriation of Funds
A non-profit grant foundation receives private donations in support of the foundation’s expressed mission. A claim is made against the foundation alleging the funds were used for purposes not aligned with the foundation’s mission.
Cost to the organization: $175,000
Breach of Bylaws
A non-profit association is named in a lawsuit filed by its members. The lawsuit alleges the recent election of a new Executive Director violated the procedures articulated in the association’s bylaws.
Cost to the organization: $115,000
Key Considerations for Management Liability Policies
Because of the litigation risks non-profits face and the high legal defense costs they often incur, it is recommended for non-profit organizations to strongly consider Management Liability insurance as part of their risk management strategy. Before choosing a policy, there are several considerations to take into account. Among the most important are:
- Limit of liability
This represents the total amount the insurance company will cover for Management Liability-related claims.
- Defense costs and limits
Defense costs are often the most expensive aspect of a D&O claim. Some policies subtract the defense costs from the stated limit in the policy, lowering the total limit available. PHLY offers defense costs in addition to the stated limit of liability.
- Claims-made policies vs. occurrence policies
Claims-made policies apply when a lawsuit is filed, while occurrence policies pay claims based on the date of the occurrence itself. The distinction is something to consider when choosing a policy.
Among the top insurers like USLI, PHLY, Hartford, Travelers, Management Liability policies are fairly standardized. When comparing these policies, the key differentiators are:
- Expertise in D&O
- Dedication to the non-profit sector
- Longevity in the market
- Experience in claims handling and service
The more experience an insurer has in non-profit Management Liability, the better they can serve their non-profit clients. The D&O coverage from the carriers we represent excel in each of these areas and bring unparalleled service to our non-profit clients and to us – the agents who serve them.
To learn more about D&O insurance coverage for non-profit organizations, get in touch with our representative today.