D&O Insurance for Nonprofit Organizations

Monday, June 1, 2009
The law does not require a nonprofit organization’s board of directors to purchase directors and officers insurance. Whether or not they decide to purchase it depends on the organization’s risk assessment of its operations, including consideration of any liability immunity available under federal and state laws. Board members should discuss their coverage needs and options with their insurance agent and attorney.

D&O Insurance

Similar to those of for-profit companies, directors and officers of a nonprofit organization face litigation exposure. This exposure includes allegations of:
•    wrongful acts, including conflict of interest and self-dealing;
•    financial mismanagement;
•    dissemination of false or misleading information; and
•    negligence, including the failure to supervise the activities of others and evading responsibility.

D&O insurance provides financial protection for certain events (“perils”) specified in the policy and includes coverage for defense costs, whether the litigation result is a judgment or settlement. Depending on how the policy defines “insured,” a D&O policy may cover acts by directors, officers, trustees, employees, and volunteers.

D&O insurance may or may not cover employment-related lawsuits, including discrimination, harassment, or wrongful termination. If it does not, an organization may purchase a separate Employment Practices Liability Insurance policy.

D&O versus Errors and Omission Insurance

D&O insurance protects against liability arising from wrongful acts by its directors and officers. It generally covers any actual or alleged act or omission, error, misstatement, misleading statement, and neglect or breach of duty by an insured person while performing his responsibilities. It should not be confused with errors and omission (E&O) insurance

E&O insurance covers liability related to performance failures and negligence with respect to products and services, not management actions.

Federal Protection for Volunteers

The 1997 federal Volunteer Protection Act (VPA) establishes a minimum level of protection for volunteers (including directors, officers, and trustees) of nonprofit organizations and government entities, for harm caused by their acts or omissions if:

1.    the volunteer was acting within the scope of his responsibilities;

2.    the volunteer, if necessary, was properly licensed, certified, or authorized to act;

3.    the resulting harm was not willful, criminal or reckless misconduct, gross negligence, or a conscious, flagrant indifference to the rights or safety of the person harmed; and

4.    the resulting harm was not caused by a volunteer operating a vehicle, vessel, or aircraft for which the state requires an operator’s license and insurance (42 U. S. C. § 14503(a)).

The protection extends to volunteers who perform services for a nonprofit organization or government entity and receives (1) no compensation or (2) nothing of value in lieu of compensation in excess of $ 500 per year. State law can provide more protection or preempt the VPA by explicitly stating that it does not apply (42 U. S. C. § 14502).   The VPA does not shield a nonprofit organization from liability or from being sued. It protects volunteers from being named directly in lawsuits (except in cases of willful or wanton misconduct).

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