I Just Started a Nonprofit. What About Insurance?
This is a question I WISH more founders asked me! What kind of insurance do I need?
A lot of the people I meet with are surprised when I tell them to talk with an insurance agent when they start a nonprofit in Minnesota. For some reason, there’s this assumption that nonprofits have less risk and don’t need insurance.
Buuuuut, it’s actually the opposite. There are some unique aspects of 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.
So I sat down with my friend Tom Wertish (you can find him over at Novallus Insurance) to chat about the policy every nonprofit, new or old, should have – directors and officers insurance. You can watch our whole convo here!
So, what is directors and officers insurance?
Basically, directors and officers insurance covers the liability of members of a nonprofit board.
You might know that 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.
I mean, think about it. If someone is suing the nonprofit, they’ll also name each board member. Does the org have enough money in the bank to go to court??
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!
That’s great! You want trustworthy people on the board. But, hang on.
There are lots of situations when your D&O insurance would be needed. Here are a few examples Tom told me about:
- Misallocating donated funds
Let’s say you started an animal rescue, and it received a $100,000 donation. Woohoo! But, the donor specified that the money should be used to save puppies.
Buuutttttt…..the org could really use new office space and a new staff member. Both could help with the mission of saving puppies in the long run, right? So the 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 decides to develop 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 a super similar product and has patented it, and they’re not thrilled that you’re selling the Thunder Jacket. Even if the nonprofit had no idea that this other product existed, it can be a real mess to sort through.
These are just two of MANY ways that you might need D&O insurance. No matter how careful you are, something unforeseen can happen.
It’s better to plan on paying a little now than to unexpectedly pour thousands of dollars into defense attorney fees later, right?
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 them to discuss all the things that could impact your insurance. Together, you can come to a good understanding of what each policy covers, and then you can make informed decisions about which policy to choose and why.
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? Watch the whole series with Tom on our Youtube channel!
Don’t miss part 2! Read it here!