I just started a nonprofit…what kind of insurance do I need?
A lot of nonprofit founders I meet with are surprised when I tell them to talk with an insurance agent. For some reason, people assume that nonprofits have less risk and don’t need insurance.
But, it’s actually the opposite!
There are some unique aspects about nonprofits that open them up for unique risks. So, nonprofits definitely need insurance, and they should be careful about what kinds of insurance they have.
First things first – a small nonprofit startup needs directors and officers insurance.
What is directors and officers insurance?
Basically, directors and officers insurance covers the liability of members of a nonprofit board.
As you may know, nonprofit board members have limited liability (assuming that they aren’t paid…learn more about that here). But, even with limited liability, just saying the nonprofit will indemnify (or, in plain English, legally protect) the board members doesn’t mean the org will actually be able to do it.
Any attorney suing a nonprofit will list the names of the board members individually. Will the nonprofit have the money to protect the org and each board member? My guess is probably not. Without insurance, a suit like this can sink a nonprofit.
But the officers of my organization would never do anything that would get them sued!
There are lots of situations when your D&O insurance will be needed. Here’s a few examples Tom told me about:
Misallocating donated funds
Have you ever gotten a donation that had instructions for how to spend the money? Let’s say your organization is an animal rescue, and it received a $100,000 donation. Awesome, that’s huge! But, the donor specified that the money should be used to save puppies (this kind of donation is called a temporarily restricted gift, by the way).
Buuutttttt…..the org could really use a new office space and a new staff member. The new office and staff could both arguably help with saving puppies in the long run, so they BOD votes to use the funds to do that. But, uh oh, the donor wanted the money to save puppies, and she’s not thrilled that the nonprofit didn’t do that. So, she sues the nonprofit.
Stepping on someone else’s intellectual property
Say the same animal rescue develops a product called a Thunder Jacket, which helps dogs who get scared and anxious in thunderstorms. Everything is going great with the new product, until the nonprofit is sued. Turns out, another company has developed this same product and has patented it, and they’re not thrilled that you’re selling the Thunder Jacket. Even if the nonprofit didn’t know about this other product, it can be a mess.
These are just two of MANY ways that you might need D&O insurance. No matter how carefully the board runs a nonprofit, it is always possible that something unforeseen can happen. At the end of the day, it’s better to pay a little now than to pour thousands of dollars into defense attorney fees later.
Picking the right policy
The most common mistake I hear about buying directors and officers insurance (beyond not buying it at all) is that nonprofits just pick the cheapest quote.
I get it, nonprofits aren’t usually rolling in cash. If you’re going to do this, it can’t break the bank. But if you’re going to do it, you should also make sure you have a policy that will actually do what you want it to do.
Let’s be real. You won’t be excited about the money you saved on your policy when it comes to claim time.
So, now what?
To get a policy that actually works for your nonprofit, you need to find a good agent and take the time with him or her to discuss all the things that could impact your insurance. Together, you can come to an understanding of what you need covered, and then you can make informed decisions when you choose a policy.
If you’d like to work with Tom (go do it, he’s the best!), learn more here.
What other kinds of insurance should nonprofits have? Stay tuned for the next installment of our nonprofit insurance series, and subscribe to Birken Law’s YouTube channel!