5 Reasons Why Not-for-Profits Should Carry D&O Insurance (article)
Not-for-profit organizations receive the same treatment as for-profits when it comes to liability for errors, omissions or other wrongful acts that involve governance, employment practices or misuse of funds. Penalties and court cases could be involved that implicate the not-for-profit’s leadership and board of directors.
Historically, not-for-profits 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 not-for-profits because they typically operate on budgets that are smaller and more likely to be affected by the reputational consequences that come with a liability issue than for-profits. An issue uncovered with how your not-for-profit 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 by offering coverage for these and other scenarios. 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 allegations of 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 Affordable Care Act. The employer-provided health insurance coverage mandate requires employers with more than 50 full-time employees to provide affordable healthcare coverage to their full-time staff. It defines full-time employees as individuals who perform at least 30 hours of work for an organization per week or 130 hours per month. 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 that insurance coverage requirements are being met, regulators are taking a closer look at how organizations are classifying their staff. Your not-for-profit should be prepared for the scrutiny and have documentation to support how you are determining which employees are full-time, including which method you use (monthly measurement or look-back measurement) to make that determination.
Terminations Can Lead to Allegations
Organizations that have had to downsize their staff levels should be aware that terminations may trigger allegations that the employee was not classified appropriately or received unfair treatment from your organization. If the employee’s departure was not a seamless one, organizations should consider enlisting the help of outside counsel to reduce the risk of a tense situation becoming contentious.
Activity in the sector indicates that employment-related lawsuits are becoming increasingly common, and not-for-profits 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
Not-for-profits need to be aware that although there are federal and state protections for volunteer-related liabilities, those protections are designed for the individuals and 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 or her assigned role with the organization;
- The volunteer has the appropriate accreditation to do what he or she is doing;
- The incident was not intentional or performed with conscious disregard for the law, or
- The incident did not involve a motor vehicle.
If, for example, it appears that the organization did not have the proper protocol in place to protect their volunteers from an incident that caused harm to the volunteer or to someone the volunteer was assisting on behalf of the organization, there could be consequences to your not-for-profit.
Not-for-profits 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 Not-For-Profits Use Their Contributions
High-profile reports on how not-for-profits spend the money they receive from donors is bringing scrutiny to all not-for-profits’ financial management practices. Regulators and the public will likely be examining how not-for-profits conduct fundraising and how they are spending donor funds. Included in this would be risks related to how not-for-profits present their financial position to donors. If organizations have been engaging in accurate or misleading disclosures of financial information to donors, they are putting their organization at risk.
Mismanagement of fundraising and donor funds are considered to be breaches of a not-for-profit organization’s role as a fiduciary to the community. Not-for-profits are often organized to serve a specific purpose to the community, and if their handling of donor contributions and fundraising efforts conflict 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 for your organization. Having fiduciary liability coverage as part of the D&O policy can help protect not-for-profits while they address allegations related to their financial management.
Protection for Governance-Related Decisions
D&O insurance can also protect the not-for-profit 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 friends and relatives on the board of directors. If not monitored appropriately, then the not-for-profit could face allegations of nepotism or other liabilities. Governance concerns can also come up related to risk management. If, for example, a not-for-profit’s governance plan does not adequately monitor and address the risks in its digital environment and it falls victim to a cybersecurity breach, it could face penalties or fines for being negligent. Insurance protection may be able to help minimize the financial damage post-breach corrective actions could lead to.
Make Sure Your Plan is Solid
In addition to the emerging issues that D&O insurance can help address, your organization should also be looking at certain elements of its policies to double check that the policies 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. You might also want to 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, it is recommended you meet with an experienced advisor who understands the risks in a not-for-profit’s environment and is also knowledgeable about what insurance coverage might be appropriate for your unique risks. For more information, please contact us.
Copyright © 2016, CBIZ, Inc. All rights reserved. Contents of this publication may not be reproduced without the express written consent of CBIZ. This publication is distributed with the understanding that CBIZ is not rendering legal, accounting or other professional advice. The reader is advised to contact a tax professional prior to taking any action based upon this information. CBIZ assumes no liability whatsoever in connection with the use of this information and assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.
CBIZ MHM is the brand name for CBIZ MHM, LLC, a national professional services company providing tax, financial advisory and consulting services to individuals, tax-exempt organizations and a wide range of publicly-traded and privately-held companies. CBIZ MHM, LLC is a fully owned subsidiary of CBIZ, Inc. (NYSE: CBZ).