5 Reasons Why Not-for-Profits Should Carry D&O Insurance (article)

5 Reasons Why Nonprofits Should Carry D&O Insurance | Property & Casualty

Nonprofit 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 nonprofit leadership and board of directors.

Historically, nonprofits 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 nonprofits 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 nonprofit manages its funds, for example, could have donors reconsidering their contributions.

Directors and Officers (D&O) Liability Insurance can help your organization mitigate liabilities in its 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.

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 you coverage if employees were inaccurately classified as contractors or wrongly labeled as exempt from overtime pay.

Classification of employees received heavy scrutiny from regulators because of the Affordable Care Act. The employer-provided health insurance coverage mandate required employers with more than 50 full-time employees to provide affordable health care 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 may take a closer look at how your organization is classifying. Your nonprofit should have documentation to support how you are determine 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

If your organizations has downsized staff levels, 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, your organization 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 nonprofits are being implicated along with their for-profit counterparts. D&O insurance can help you cover the cost of some legal fees related to employee allegations.

Volunteers Have Federal & State Protections

Your nonprofit should 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 your organization did not have the proper protocol in place to protect 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 nonprofit.

If your nonprofits employs a large volunteer workforce, make sure you are familiar with the volunteer protection statutes in the jurisdictions in which you conduct operations and ensure you have D&O coverage that protects from volunteer-related liability.

How Nonprofits Use Contributions

High-profile reports on how nonprofits spend the money they receive from donors is bringing scrutiny to all nonprofits’ financial management practices. Regulators and the public could examine how your nonprofit conducts fundraising and how you are spending donor funds. Included in this would be risks related to how your nonprofit presents itsr 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 nonprofit organization’s role as a fiduciary to the community. Nonprofits 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 your nonprofit while you address allegations related to financial management.

Governance-Related Decisions Protection

D&O insurance can also protect your nonprofit 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 nonprofit could face allegations of nepotism or other liabilities. Governance concerns can also come up related to risk management. If, for example, your nonprofit’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 nonprofit’s environment and is also knowledgeable about what insurance coverage might be appropriate for your unique risks. For more information, connect with a member of our team


This publication is distributed with the understanding that CBIZ is not rendering legal, accounting or other professional advice. 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.


5 Reasons Why Nonprofits Should Carry D&O Insurance | Property & Casualtyhttps://www.cbiz.com/Portals/0/Images/GettyImages-1280766971.jpg?ver=mkJ_6qw5hm7TYJvWV13zAA%3d%3dD&O insurance can help protect nonprofits in a number of different scenarios....2016-06-21T12:18:00-05:00D&O insurance can help protect nonprofits in a number of different scenarios.Not-for-Profit & EducationProperty & Casualty Insurance