Organizations
How to Protect Your Nonprofit’s Board of Directors with D&O Insurance
Board members make important strategic and financial decisions for the organizations they manage. These decisions could result in a liability, with a single unfortunate incident jeopardizing an individual’s livelihood and possibly their career. Worse, accusations against a board member could cause potential donors to shy away from an organization, representing a significant loss in revenue.
With such a high potential risk for personal liability, it is important that board members protect their careers and finances if charges are ever brought against the organizations they serve.
What is Directors and Officers Insurance for Nonprofits?
Directors and Officers (D&O) Insurance protects a nonprofit’s decision makers’ personal assets and careers if they were to be sued, and it can also extend to cover legal costs the organization has to spend to defend or settle. Board members of international organizations, who may be perceived as having significant assets, could face increased risks. It’s crucial for these decision makers to protect themselves with board member insurance.
In 2011, one of the United States’ largest international charitable organizations was the subject of a criminal investigation by their state’s Attorney General regarding misuse of grant money. The organization’s board could have been held liable if it failed to implement proper controls or oversight to deter fraud or misuse.
What is the Importance of Protecting Nonprofit Board Members?
It is common knowledge that for-profit businesses are at risk of liability. Unfortunately, nonprofits are too, and it can significantly disrupt the organization’s ability to accomplish its mission. International nonprofits are especially vulnerable to legal action.
According to Clements’ Commercial Insurance representative, Kevin Pedone,
“When you are operating outside the United States, expatriate organizations are looked at as deep pockets. Even though some countries are less litigious, it is always an issue of concern.”
Common legal action that nonprofits are exposed to are detailed in the section below.
If a nonprofit is sued, board members can be held personally liable for the actions of the organization, as they have fiduciary duties to the nonprofit as well as its beneficiaries and donors. This means the personal assets of a nonprofit’s directors and officers are at risk. Matt Tuman, Senior Commercial Advisor at Clements, says this is a blindspot for many board members.
“When you are a director or officer of a nonprofit, your personal assets are at stake, but a lot of them don’t know that. Individuals volunteer but don’t realize their involvement is more than ‘just helping’ when their personal assets are at stake.
I think a lot of nonprofits overlook this element. They think, ‘You love my cause! You’ll never sue me!’ but that’s not the case.”
– Matt Tuman, Senior Commercial Advisor, Clements Worldwide
Liability Risks Faced by Board Members
Any liability scenario could lead to a costly and disruptive investigation. Organizations involved in fundraising or grants are especially at risk. Competition for grant money often leads to serious questions about how grant funds are utilized. Any perceived improper use of grant funds can lead to a legal case. Fundraising presents a similar risk, as donors could perceive a mismanagement of funds raised and pursue legal action.
“Nonprofits are different than for profit corporations because they don’t have shareholders,” says Tuman. “But they do have a requirement to manage the organization’s assets and put procedures in place to reduce fraud or misuse. If there were an issue of insolvency because of mismanagement of the funds, that could result in a lawsuit against the organization.”
Failing to provide proper oversight to deter fraud can also leave nonprofit board members liable if grant or fundraising money is misused. Something as simple as failing to keep proper expense records can lead to a serious lawsuit.
What Board Member Insurance Can Help Protect Against
Board members at international schools and nonprofits are often shocked to learn that lawsuits against their organizations could put their personal assets at risk. Directors and Officers (D&O) liability coverage can help protect those assets amid claims of:
- Wrongful termination
- Discrimination
- Sexual harassment
- Conflicts of interest
- Fraud
- Embezzlement
- Mismanagement of organizational assets
- Not filing annual reports
- Issuing inaccurate or misleading reports
- Mismanagement of retirement accounts
- Violations organizational bylaws
Managing Liability Exposure for Board Members
A common assumption is that nonprofit organizations are protected by law from liability, but this is not always the case. Whether a donor, employee or a beneficiary sue for a perceived mistreatment by the nonprofit, including in relation to the core services provided by the nonprofit, the liability could lie with the board and directors, and this may vary based on the country of operation.
However, there is a way to manage risk posed both to an organization and its board members with directors and officers (D&O) liability coverage. An umbrella policy can be purchased by organization for the entire board, with modified limits for board members with significant assets purchased by the organization or the individual board member.
D&O insurance coverage can be highly customized, with the extent of the protection, and ultimately the cost, varying based on the limitations and exclusions listed in the policy. The liability insurance policy for board members will cover costs of mounting a defense or paying a settlement. Even for startups, D&O liability coverage is crucial. This layer of protection ensures that the organization, as well as its employees, are safeguarded against perils overseas.
By learning about potential liabilities faced by international nonprofit board members, an organization’s directors and officers are positioned to strategically manage risk and ensure continuing operations. Speaking with an insurance professional experienced in helping to protect international nonprofit board members can give nonprofits a clear understanding of how they can protect their personal assets in the event of a liability claim.
Relevant Helpful Resources
Find tips, trends, and perspectives to help you confidently make decisions and navigate challenges internationally with peace of mind. Read how you can live, operate, and manage risks abroad.
The Need for Specialized Insurance: Why Mass Market Insurance Falls Short for High Net Worth Individuals
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International NGO Recruitment Strategies: Attract & Retain the Top Nonprofit Employees
How NGOs Can Hire for Impact and Build a Committed Workforce
Minimizing Risk, Maximizing Impact: Critical Insurance Coverages for NGOs
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