Why You Need Directors & Officers Insurance

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. 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 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 up, nonprofits NEED directors and officers insurance.

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 they aren’t paid for their board service). 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.

If someone is suing the nonprofit, they’ll probably also name each board member in the suit. 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’s a few examples:

1. Misallocating donated funds

Let’s say you started an animal rescue, and it received a $100,000 donation. Woohoo! The donor specified that the money should be used to save puppies.

But, the org could really use a new office space and a new staff member. Both could help with the mission of saving puppies in the long run, right? So they board votes to use the funds to do that. But, uh oh, the donor, wanted the money to save puppies, and they’re not thrilled that the nonprofit didn’t do that. This could end in an ugly lawsuit.

2. 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.

So, now what?

If you don’t have directors and officers insurance, you need it! It’s better to plan on paying a little now than to unexpectedly pour thousands of dollars into defense attorney fees later, right?

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.

I’d highly recommend Tom Wertish from Novallus Insurance Brokers. Learn more about him here: https://www.novallus.com/

Have concerns about this topic? Remember you can schedule a member consult with me.