Importance of Directors and Officers Insurance for Nonprofit Boards 

Omar Visram
Importance of Directors and Officers Insurance for Nonprofit Boards 

Directors and Officers liability insurance (or D&O) protects nonprofit organizations and their boards against risks not covered by general liability insurance. So it wasn’t surprising when a 2021 survey conducted by The Mahoney Group found that nearly two-thirds (64%) of nonprofit organizations purchased D&O.

If you’ve yet to consult with your insurance company about a D&O policy, this article will help you understand the importance of protecting your organization, what Directors and Officers insurance for nonprofits typically covers, and the benefits you can expect it to provide. 

Why Directors and Officers insurance for nonprofits is crucial

Directors and officers (like your treasurer, for example) are at the heart of every nonprofit. Not only do they guide an NPO’s mission, they oversee its programs and services.

This makes your board of directors liable for a wide range of operational duties, including:

  • Setting policies and procedures
  • Approving budgets
  • Determining worker policies

Since board members are required by law to carry out their duties properly and without conflict of interest, they’re unusually vulnerable to legal claims involving wrongful acts.

As a result, having D&O insurance is crucial for protecting your nonprofit against actions or consequences arising from decisions or omissions made by your board.

What does D&O insurance cover?

While you should speak with your broker about specific coverage, once your application form has been approved, you can typically expect D&O insurance to financially safeguard your nonprofit from lawsuits involving:

  • Third-party claims of defamation or alleged losses. These often revolve around improper financial acts, errors, omissions, misstatements, or misleading statements
  • Neglect of duty or breach of trust. This could include failure to follow provincial or federal laws and regulations, for example, or claims involving mismanaged funds (like if a donor or creditor were to suspect products or services were being purchased from a board member’s business)
  • Improper human resources or employment practices. Think discrimination, harassment, unsafe work practices, or wrongful dismissal

Although Directors and Officers insurance for nonprofit boards can’t prevent claims from happening, it can mitigate the high costs of defending against those claims while protecting board members’ personal assets.

4 Main benefits of Directors and Officers insurance for nonprofits

1. Protects against legal costs and financial loss

Despite being volunteers in many cases, your board can still be held personally liable for allegations brought against your organization. 

D&O business insurance helps to protect nonprofit board members from personal financial loss by covering the costs of legal liabilities in the event of a claim.

These typically include:

  • Defense costs and other legal fees
  • Financial settlements
  • Damage awards arising from judgements

This can potentially make D&O coverage extremely cost-effective in the long run.

2. Mitigates risk related to errors

Many NPOs struggle to find the highly skilled staff that they need. Since that means they won’t always have trained accountants or financial professionals handling their books, they’re at greater risk of committing tax or financial reporting errors.

One of the main reasons to get Directors and Officers insurance for your nonprofit is that it can prevent unintentional mistakes from bankrupting your organization. 

There’s also the added benefit that individuals and foundations are more inclined to support NPOs with financial protection. By defending against fraudulent claims, D&O insurance helps keep your giving pipeline intact and secure.

3. Makes it easier to recruit and retain talent

Having directors or officers with business or legal expertise overseeing your nonprofit’s day-to-day operations helps to ensure its success. 

Since qualified professionals will feel far more comfortable working with you if they know they’re financially protected against privacy or legal disputes, maintaining D&O liability insurance can make it easier to recruit and retain talented board members.

4. Provides peace of mind

How much is peace of mind worth to your organization? That’s essentially what you’ll gain from D&O coverage: reassurance that your nonprofit will be shielded from legal expenses or financial damages in the event that you’re sued. 

Even if an allegation against your organization is unfounded, it’s important to recognize that the costs of the lawsuit remain. 

Investing in D&O insurance as part of your NPO’s risk management plan frees you to focus on providing services and carrying out your mission—without having to worry about the threat of financial repercussions.

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