September 26, 2016

5 reasons not-for-profits should carry D&O insurance


Not-for-profit organizations (NFPs) receive the same treatment as for-profits when it comes to liability for errors, omissions or other wrongful acts involving governance, employment practices or misuse of funds. Penalties and court cases that implicate the NFP’s leadership and board of directors could occur.

Historically, NFPs have not gotten off any easier than their for-profit counterparts in settlements. Resolving employment, financial and governance-related liabilities can be particularly difficult for NFPs because they typically operate on smaller budgets, and they are more likely to be affected by the reputational consequences. An issue with how your NFP manages its funds, for example, could have donors reconsidering their contributions.

Directors and officers (D&O) liability insurance can help organizations mitigate the liabilities in their operating environment. If your organization hasn’t considered adopting or updating its current policy, here are five reasons why it should.

The ACA brought renewed attention to employee classification.

Employment practices liability is a standard part of most D&O insurance policies. This liability coverage typically can be used in situations that involve personnel, such as wrongful termination, defamation, sexual harassment or discrimination. It can also provide coverage if employees were inaccurately classified as contractors or wrongly labeled as exempt from overtime pay.

Classification of employees is receiving heavy scrutiny from regulators because of the ACA. The employer-provided health insurance coverage mandate requires employers with more than 50 full-time employees to provide affordable health care coverage to their full-time staff.

Exceptions are provided for volunteer employees, whose hours of service do not count as work hours. There are also special provisions for adjunct faculty and on-call staff.

To ensure insurance coverage requirements are being met, regulators are taking a closer look at how organizations are classifying their staff. Your NFP should have documentation to support how you are determining which employees are full-time, including which method you use (monthly or look-back) to make that determination.

Terminations can lead to allegations.

Organizations that have downsized should be aware that terminations may trigger allegations that the employee was not classified appropriately or received unfair treatment. Activity in the sector indicates that employment-related lawsuits are becoming increasingly common, and NFPs are being implicated along with their for-profit counterparts. D&O insurance can help cover the cost of some of the organization’s legal fees related to employee allegations.

Volunteers have federal and state protections.

Be aware that although there are federal and state protections for volunteer-related liabilities, those protections are designed for the individuals, not the organizations for which they volunteer. For example, the Federal Volunteer Protection Act protects volunteers from liability in the event that:

  • the incident occurs while the volunteer is performing his/her assigned role with the organization
  • the volunteer has the appropriate accreditation to do what he/she is doing
  • the incident was not intentional or performed with conscious disregard for the law
  • the incident did not involve a motor vehicle.

NFPs with a large volunteer workforce should be familiar with the volunteer protection statutes in the jurisdictions in which they conduct operations and ensure they have D&O coverage that protects the organization from volunteer-related liability.

The spotlight is on how NFPs use contributions.

High-profile reports on how NFPs spend donor contributions are bringing scrutiny to their financial management practices. Regulators and the public will likely be examining how NFPs conduct fundraising and how they spend donor funds. Included in this are risks related to how organizations present their financial position to donors. If they have been engaging in inaccurate or misleading disclosures of financial information to donors, they put their organization at risk.

Mismanagement of fundraising and donor funds is considered a breach of a NFP’s role as a fiduciary to the community. NFPs often are organized to serve a specific purpose for the community, and if their handling of donor contributions and fundraising efforts conflicts with this mission, they could face serious ramifications.

Other fiduciary-related risks, including mismanagement of an employee benefit plan or grant contributions, may also trigger consequences. Having fiduciary liability coverage as part of the D&O policy can help protect NFPs while they address allegations.

Protection for governance-related decisions.

D&O insurance can also protect from governance-related errors or omissions. For example, an organization may not have adequate policies around the practice of hiring friends and relatives or placing them on the board of directors. If not monitored appropriately, the NFP could face allegations of nepotism or other liabilities. Governance concerns related to risk management also can arise. If, for example, a NFP’s governance plan does not adequately monitor and address the risks in its digital environment and falls victim to a cybersecurity breach, it could face penalties or fines for negligence. Insurance protection may help minimize the financial damage post-breach corrective actions could lead to.

Make sure your plan is solid.

Your organization also should look at certain elements of its policies to ensure they provide the coverage they say they do. Look for exceptions, such as insurance coverage options that pay for employment-related breaches of contract issues but not breaches of contract not directly related to an individual’s employment. Also, speak with your insurance provider about your policy limit and the risk you would have of exceeding your limit during the coverage period.

To select the right plan for your organization, meet with an experienced adviser who understands the risks in a not-for-profit’s environment and is knowledgeable about what insurance coverage might be appropriate for your unique risks.

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