Directors and officers of nonprofit organizations have a lot of responsibility. They have a duty to exercise due diligence in overseeing the management of the nonprofit. They must act in good faith, and in the best interest of the organization.
According to the authors of an article in Nonprofit Quarterly, the expense is worth it. “It is our number one risk-management tool, and we think that every nonprofit ought not to have to think twice about picking up the phone or sending an e-mail and getting free expert advice.”
Here’s why Directors and Officers insurance is a perfect risk management tool for nonprofit organizations.
THE THREE DUTIES OF EVERY DIRECTOR AND OFFICER
There are three basic duties that every director and officer has:
1. Duty of care – This means that they must act reasonably, in good faith, and in the best interest of the organization.
2. Duty of obedience – They must obey all applicable bylaws.
3. Duty of loyalty – The interest of the organization must be placed before their own interest.
OTHER LIABILITIES OF DIRECTORS AND OFFICERS
Beyond the three basic duties listed above, directors and officers may be liable for other things. Anyone considering a position as a director or officer on a nonprofit board should carefully consider the risks involved, and inquire as to whether or not there is a Directors and Officers Liability insurance policy in place.
- Failure to act as stated under a statute – This means that all required reports and records must be kept and maintained. Failure to do so may result in the director or directors to be liable for the offence.
- Noncompliance of the organization – If the organization suffers a loss, an employee claims there is discrimination, or there is a wrongful dismissal of a staff member, directors can be held personally liable. If the nonprofit cannot pay for the suit, the director could be required to pay out of pocket for legal fees and damages.
Remember: Neither ignorance nor resignation are considered reasonable defences. And as a nonprofit director, you could be held responsible for decisions made by past boards, even if you had nothing to do with them, or were not a part of the organization at the time the decision was made.
Having a Directors and Officers Liability insurance policy can protect the individuals that are giving their time over to the important work of running the nonprofit.
COMMON SUITS AGAINST NONPROFITS
Lawsuits against nonprofits and their directors can stem from any number of reasons. The most common ones allege:
- Improper HR Practices or violations of employee legislation such as not paying wages on time, wrongful dismissal, discrimination, or improper classification of employees.
- If creditors or donors believe funds were handled negligently, they could sue the nonprofit and its leadership to recover losses. This is most common when the nonprofit makes an investment that loses money.
- Fiduciary liability such as improper fundraising, improper revenue reporting or mishandling of donations or employee benefits plans.
Many nonprofit leaders take on the job because they have a passion for the cause, and may not be well-versed in the duties and rituals of corporate governance. Directors and Officers insurance protects against losses caused by negligence or honest mistakes made by your organization’s directors and officers. Not only will it cover any amounts you’re required to pay should you lose a lawsuit, the insurance company will even pay for your legal fees and court costs. This is important because even though your nonprofit may be run by a perfect leadership team, just the cost of defending a frivolous lawsuit can cripple your ability to operate.