Board Insurance: Do You Really Need It?

We wanted an expert's view on what nonprofits need to know about Directors & Officers (board) liability insurance, so we asked Susan Bradshaw, VP at the Nonprofits Insurance Alliance Group. (And don't miss the link to a free booklet on D&O at the end of the article):

In today's tight economic environment, nonprofits are facing tough budget decisions, and one expense that often comes up is D&O insurance (Directors & Officers liability insurance). How should a board of directors think about this insurance?

Some statistics from our 10,000 insured nonprofits to get your attention:

  • About 1 in 100 nonprofits each year will file a claim under D&O insurance
  • Average cost of a settlement in a D&O claim (meaning it didn't go to court): $28,000
  • Average legal costs of defending a claim: $35,000

Most D&O claims are employment related: at the Nonprofits Insurance Alliance Group -- which includes both the Alliance of Nonprofits for Insurance (ANI) and the Nonprofits' Insurance Alliance of California (NIAC) -- we know that more than 95% of claims filed against D&O policies are related to wrongful termination, harassment, or discrimination, and so forth. And add to that, during economic downturns, there is an increase overall in the number of employment-related disputes as employers downsize and those fired or laid off find it harder to find employment. 

D&O insurance provides coverage for "intentional" actions taken by an organization's board of directors or management that someone else thinks is wrong. So since the board approved all your personnel policies (intentional act), if your nonprofit fires someone and that individual disputes whether you followed your policies . . . well, you get the picture. Or perhaps you followed all your policies but the employee still believes they have been discriminated against or wronged.

Maybe they were wronged and maybe they weren't, but either way, getting to an answer is probably going to be expensive. Your general liability policy is not going to kick in for a third party -- that coverage is for bodily injury, not for claims by employees. If you have coverage for employment-related lawsuits, that is almost surely going to be found in your D&O policy.

Two more eye-catching statistics:

  • One in every 10 claims costs more than $100,000 (whether a settlement or court determined)
  • The two largest claims to date: $500,000 and $1 million

I don't know any nonprofit that has those types of dollars just lying around to pay out in a lawsuit!

What are the key features to look for when purchasing D&O?

While it is very tempting to go for what appears to be the cheapest price, there are a couple of things you need to consider. Ask these two key questions first:

  • Is there a deductible? Don't get burned by this one! There are policies in the market with no deductible at a very reasonable premium. Remember: deductibles can add up! Just because the quoted premium might be less -- keep in mind, one claim and a $5,000 deductible can easily triple the original cost of the policy.
  • Does the insurance company provide any employment practices assistance? If so, is it only by phone or are email communications also included? Is it free or just subsidized? Is it an unlimited service or is it capped at one or two hours? Make sure you ask these questions. Just two or three consultations a year could easily save you more than the cost of the policy.

Also make sure that the policy language is broad. For example:

  • Who, exactly, is going to be insured under this policy? Make sure it includes coverage to any person who was, is, or becomes a director, trustee, officer, employee, committee member, or volunteer of the nonprofit as well as the nonprofit itself. 
  • Are all costs paid by the insurer as they are incurred? You should not have to front these dollars.
  • Does it include broad coverage for employment-related activities? Although it is becoming more common that employment-related activities are covered in the D&O policies, don't assume it is covered -- ask! A broadly written policy covering employment practices should insure a defense for claims alleging a wide range of wrongful employment actions.

OK, so you don't have employees. So based on the data you're thinking you don't need the coverage. Two reasons you should still consider it. First, some individuals are reluctant to serve on a nonprofit board that doesn't have D&O insurance. Check with board members to see if they might each chip in a small amount to make sure they are covered for decisions they make while governing the organization.

Second, a claim which is becoming more common is alleged breach of contract, such as failure to pay an equipment lease or to pay a contractor for work performed. D&O policies are different in how they respond to claims alleging breach of contract. No nonprofit, no matter how small or how few employees, is exempt from this sort of lawsuit.

What about the board member's homeowner or umbrella insurance?

This question often comes up when I speak with boards, but more than likely their homeowner's insurance protects them for serving on for-profit corporate boards, but excludes volunteer nonprofit board service. And even if that coverage is there, not all board members are homeowners or have the right coverage.

What about legal protections for volunteers?

Legislative protections for volunteers are good, but are not in all states. In addition, even where such protections exist, they can't protect you from violations of the Americans with Disabilities Act (ADA), ERISA (Employee Retirement Income Security Act), or civil rights laws.

Is there anything D&O can't cover?

Yes. In addition to the above, D&O legally can't cover you for tax liabilities the organization incurs, or for any deliberate acts, such as criminal acts.

So, if you are a part of a nonprofit organization, consider D&O as a "must have." Overlooking D& O puts board members at risk unnecessarily. Approach D&O insurance as a positive and essential investment for your organization.

Free booklet: A downloadable, free booklet on D&O insurance is available on the NIAC website; click here. You'll see other free booklets there, too.

Susan Bradshaw is VP for Marketing, Member & Broker Services at the Nonprofits Insurance Alliance Group (which includes the Alliance for Nonprofit Insurance and the Nonprofits' Insurance Alliance of California). Look for her and NIAG at the next nonprofit conference you attend. Susan spends a lot of time on airplanes visiting nonprofits in various states. She has served on the board of a school for people with autism and a nonprofit providing recovery services. The Nonprofits Insurance Alliance Group is a founding and ongoing sponsor of Blue Avocado.

See also in Blue Avocado:

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Comments

For a clip from a Seinfeld episode where George tries to read about risk management, see here. This public service announcement brought to you by Blue Avocado's Susan Sanow.

I agree with the points made in this article, but would like to see a more balanced perspective--how about also interviewing someone who is not affiliated with the insurance industry?

I'd like to point out that all of the companies in the Nonprofits Insurance Alliance Group are 501(c)(3) nonprofits. We now insure more than 10,000 nonprofits across the country. We consider ourselves to be part of the nonprofit sector, not the insurance industry. I founded the first company in our group, Nonprofits' Insurance Alliance of California, out of my graduate thesis at UC Berkeley. I did so because in the mid-1980s nonprofits could not find affordable liablity insurance. I thought that nonprofits were far better risks than the insurance industry gave them credit for and I proposed that if we could create companies that were nonprofits themselves and only for nonprofits, we could save our sector a lot of money. It is hard to determine exactly how much we save each year, but for starters, we have returned $22 million in dividends to our member-insureds over the past 5 years. We also have retained earnings of more than $100 million that otherwise would have become insurance company profits but now are assets of the nonprofit sector. So, yes, we provide an important infrastructure service to our fellow nonprofits--insurance--but we are not "affiliated with the insurance industry." We are heart and soul a proud member of the nonprofit sector.  --Pamela Davis President and CEO Nonprofits Insurance Alliance Group

ADA, as many employment laws, are certainly rife with gray areas and contradictory interpretations. Ask five "experts" and you'll likely get five different answers. It's my understanding, however, that ADA is not applicable to volunteers, only to employees.

I found this article to be a sales pitch and wish that it had actually addressed the title question objectively "Board Insurance: Do You Really Need It?"

Thanks for your comment. What I was trying to convey was that nonprofits really do need to have this coverage - 1) to get good people to serve on their boards 2) if they have employees, to protect themselves from employment related claims 3) that we are now seeing more claims related to breach of contract. I used our real-world experience with claims to help shape the discussion.

We are a 501 (c)(6) volunteer not for profit organization with no employees and only one contractor. Should our board be concerned with D&O claims by our members? What about claims by those we enter into contracts with? I apologize if this is considered "seeking advice," which is not my intention. I'm just looking for some clarification since most of the articles I have seen refer to employment claims. Thank you.

Very good article Susan. It makes me think that I need to put together some statistics of our own to talk about when we meet with our nonprofit clients that are on the fence about purchasing the coverage. Well done.

Thanks. I appreciate the feedback. Make sure you download the D&O booklet. Thanks again. Susan

I, too, was disappointed with this article. With our insurance renewal coming up in a couple of months I was excited to see the article heading, but the title was misleading and did not cover what it described it would. It lead me to believe it would cover the different types of insurance a non-profit really needs vs. add ons that one could do without during these economic times. Instead, this article was just a plug for NIAC and my understanding is they are a collective, and not an actual insurance company. Can another article be written by someone from an insurance company that specializes in non-profits that tells what products are best, are necessary to have, or can wait until the non-profit is able to afford the add ons? What about insurance that covers use of vehicles, or slips and falls by volunteers? Better yet, how about a survey from current non-profits of what coverages they find to be the mosts comprehensive for the price?

The article was meant to cover only directors and officers insurance not the other coverages that a nonprofit typically needs such as general liability (slips and falls, auto insurance and other coverages were intentionally not covered in this article - just D&O). I also want to clarify who NIAC is. NIAC is a 501(c)(3) nonprofit that has been providing stable liability insurance to nonprofits in California for more than 21 years. We currently insure more than 7,000 nonprofits in CA and NIAC's affiliate ANI insures close to 4,000. So combined we now insure more than 10,000 nonprofits. We are part of the sector and one of the most successful social enterprises out there.We are a liabiity risk pool - part of the alternative insurance market - and are rated A (Excellent) by A.M. Best. (an insurance rating agency) So we are for real - and frankly whether a nonprofit is insured by us or not they are benefiting from us just being in the marketplace because the commeerical carriers have had to react to us being around.

Wow, so your reply is just yet another advertisement ? Really ?

Can you give us an idea of what this kind of insurance costs for a small non-profit? Hard to weigh the cost/benefit if we don't have an idea of the annual out of pocket expense.

Most insurance companies have minimum pemiums for D&O which start around $750 annually. I larger organization, say $5 - $6 million budget might see a premium around $3 - $4k. Of course this depeneds on limits, type of business, state domiciled, past claims, and financials.
As for the question about other products, your insurance agent should be defining each coverage for you and what it costs. Typcially, most organizations buy property, general liability, auto, professional liability, sexual abuse, umbrella, and D&O. Recently, the market has really expanded meaning more carriers are writing non-profits and at cheaper prices than ever before.

I used to think that nonprofits only needed D&O insurance if they were controversial (because their enemies might sue) or if they served vulnerable populations. But I learned something important from this article and the comments. First, that 1% of nonprofits have a D&O lawsuit brought against them in a year -- I have fire insurance on my house although far less than 1% of homes have a fire in a year. And second, that rates have come down. It used to be that $4,000 was the minimum that you could pay for D&O, but now it's often as low as $750.

I appreciate the readers who have commented that this article was too much in favor of purchasing insurance. At the same time, I also respect the fact that Susan's seeing so many expensive lawsuits is the reason why she feels so strongly about the need for D&O.

Clearly it's still a judgment that nonprofits have to make when they decide about buying insurance of any kind. For some organizations, a lot of insurance is worth the peace of mind if staff and board are nervous. For others, where staff and board aren't the least bit nervous, it feels like an unnecessary expense.

Another feature to consider when choosing between policies: what rate will the carrier pay for attorneys to represent you if you are sued? When we were sued, we found out that our carrier had a maximum rate for attorneys' fees that might get you a good attorney in Topeka, but was about half the going rate for a competent specialist in the San Francisco Bay Area. Our theoretical right to choose our own counsel was severely constricted by the carrier's maximum rate.

I would reiterate a number of your responses - the title for this article is misleading, the article is not helpful. Blue Avocado has run number of pieces on D&O insurance, all written by the same folks, and they all end up the same - assuming that all nonprofits, no matter how small, with or without employees, no matter their own perceived exposure, should buy D&O.

I'd like to see an article not written by ANI, NIAG or NIAC that offers a further examination of the numbers and possible considerations not to get D&O. Of the 1% of the claims, 95% are employment related. Describe the breakdown of the other 5%. What is the average amount, nonprofit size, claim type, etc.

Is deep pockets - having them or not having them- an issue? Purely based on an examination of the record of claims, is the annual budget size of the NPO a factor in determining whether a D&O eligible lawsuit is filed.

If a small nonprofit decides it cannot afford or does not see the value of the $750/year premium, what other steps can it take to otherwise protect itself and its Board members? Throw in the caveats by all means but give us something to chew over.

As the article tried to convey, the most likely claim that you will get filed against you if you don't have employees is breach of contract. As for the data supporting that, in my experience other carriers typically do not make the time and take the effort to write about the small number of claims against those organizations that don't have employees. Most don't have the aggregated data and don't want to share it if they do. I would have been happy to ask my staff to review the data we have on this separate group, but I can see that you would prefer not to have further data from us. If you don't want to buy D&O, the best thing you can do is to fufill all of your financial obligations and not take any action, such as terminate a volunteer, that might trigger a lawsuit. To be clear, the chances of your getting sued if you have no employees is very low. This is a low frequency, potentially high exposure risk. If you and your board of directors feel comfortable with that, then by all means, you need to make the decision that feels right for you. People have all sorts of risk tolerances. We are just trying to give you the information we have and we trust that you will make the best decisions for your organizations with this information. Pamela Davis President/CEO Nonprofits Insurance Alliance Group

Yes, you do want to consider D&O insurance for nonprofits. However, buying insurance is barely the beginning of risk assessment in nonprofit work, even if it only involves volunteers. There is a federal law of volunteer protection and all or almost all states have some form of volunteer protection. They do not pay for lawyers to provide legal advice or help in a potential law suit. That could be a deal breaker depending on the potential risk of an organization. The laws are OK but not all-covering by a long shot. Please remember, anyone can sue anyone, anytime and anywhere. The goal is not to lose. I suggest that boards become vigilant in assessing what risks are potentially involved by the board, volunteers, staff, and clients who enter your property, if any. What are the potential dangers, hazards, mistakes, or other risks in the work of the organization? That discussion should be early in the life of an NPO and should be ongoing for the life of the organization. Part of the risk assessment should be the development of written policies, practices, procedures and recordkeeping addressing potential hazards, accidents, mistakes, crime, fraud, breach of contract and so on, The assessment should also consider the ethics of the organization and what is ethical for board members and to which the board should adhere. Confidentiality and conflict of interest are two problems that should be addressed. There are many forms of D&O insurance. Not all policies are the same. In this day of litigation first, negotiations second it is good to know what you need and what you are buying and what the deductibles may be, what the limits of a claim are and what is not covered. Many organizations also buy E&O when they have employees. Look at these policies and consider the potential of discussing with an insurance consultant and agent about umbrella coverage. Many policies sound good, but may leave something out that you need – for instance in the employment area, wrongful hiring or discrimination in all forms. General liability insurance, commercial property, personal liability to cover volunteers and accident insurance should be considered. You will want to make sure that any vehicle used for the work of the organization is insured by the owner and the driver has a legal license. There is insurance for the organization to cover vehicle accidents involving volunteers and staff. Finally, someone needs to read and understand the policies. They are dry and legalized to the nth degree. Someone has to be sure to know what is and is not covered, where the policies are kept, when they come due for renewal which could include changes in the coverage. What you buy one year will not be the same the next. The board leaders who handle risk assessment need also to know where to call in the event of a potential claim, what telephone number to call, who you can speak to who can be part of the confidentiality of the claim. For instance, giving the details of a claim to the insurance agent or a secretary at the insurance company may not be protected when it comes to confidentiality

I recently took over as president of an Alumni Association. Our only goal is to raise money through alumni dues, donations and a once or twice a year fund raising event ( I realize we need inurance for the events but do we need it for anything else?). We then give the money away in scholarships There are 11 of us on the board. We are all volunteers there is absolutely no payroll. We have no building, office, etc. We meet in our local community center. Do we really need D&O Insurance?

I would be interested in any answer to this. Steve very closely describes my organization also. The point is to raise money and gift it all away, no overhead, no expenses. Can someone with expertise please respond to this? thanks Joyce,

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