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August 17 is National Nonprofit Day, a good time to think about how important it is to protect those in key leadership roles. Serving as a director can be a meaningful way to give back, support ideas and work you care about, and share your expertise with a nonprofit that could use it. But these roles also come with risks.
For family members thinking about joining a board or already serving, it’s important to understand what kind of coverage and protection the organization offers.
Our recent Family Office Benchmarking Study found that nearly 60% of the families surveyed serve on boards of directors. However, only 16% of those in director roles have stand alone directors and officers' (D&O) coverage.
In our Private Client Benchmarking Study, we saw that among private clients with board roles, just 57% have separate D&O coverage to protect against liability. This gap shows how common it is for people in meaningful board roles to be unaware of the risks they might face. Not having the right coverage could be a costly mistake.
Let's look at how you and your family could make sure you’re protected if you're thinking about or already serving on a nonprofit board. Taking proactive steps can give you peace of mind, so you can focus on supporting the organization's mission without worrying about insurance gaps or missteps.
Directors who sit on the boards of public companies or large private corporations often ask the organizations questions about directors and officers (D&O) liability insurance coverage, indemnification, and internal controls prior to agreeing to serve on these boards. But even sophisticated individuals sometimes bypass such questions when invited to join the board of a nonprofit organization.
Nonprofits do much good, from raising awareness of social and environmental issues to supporting charitable endeavors that improve lives and communities. And many successful businesspeople and donors generously support these organizations by giving their time and talent to nonprofit boards.
However, the reality is that nonprofits of all sizes and in all sectors, may be litigation targets. It is not uncommon for directors and officers at nonprofits to face allegations of fraud, wrongdoing, or liability for employment practice issues—all of which have become more common during the pandemic. For example, according to Insurance Business America, a major liability exposure for nonprofits is the mismanagement of funds. Managing these challenges improperly could result in lawsuits.
Managing liability risk is a two-way street for organizations and those they invite to serve on their boards of directors. Individuals may feel more comfortable participating as directors when they are less worried about exposure to lawsuits, and nonprofits benefit from the experience and insights that directors can bring when the directors are confident in their decision-making.
Nonprofit organizations tend to have less rigor and structure around risk management than private businesses, and they do not have the reporting requirements of public companies. Therefore, every individual asked to participate on a nonprofit board should raise certain questions:
Nonprofits commonly purchase D&O liability insurance, but it is critical to understand the quality of the coverage. The D&O policy may be written very broadly to better protect board members, or it could be written with coverage restrictions. It is important to have an experienced insurance professional review the coverage in an effort to best protect the individual director as well as the organization. That said, there are differing types of D&O insurance policies. For example, a Side A policy, which offers coverage solely for the directors and officers, typically sits above a traditional D&O policy and would not provide coverage for suits against an organization itself. It is imperative to understand the policy structure, total amount of coverage, and how the insurance will respond to lawsuits.
Smaller organizations might opt for a minimal level of coverage limits, such as $1 million. At face value, that might seem high relative to a nonprofit’s assets. In reality, $1 million today is not a lot of protection for high-net-worth directors. Even in a seemingly frivolous allegation, defense costs can add up quickly to hundreds of thousands of dollars. It is also important to understand that the limit is typically shared between the entity and the individual directors and officers. All these factors may serve to erode policy limits quickly.
An advantage of D&O insurance for nonprofit and private organizations is that the coverage is typically very broad. It could respond to a variety of claims, from financial losses to employment practice allegations to third-party liability arising from alleged wrongful acts by management. While the broadness is often beneficial, it could be a negative as well, as the policy proceeds to defend even fraudulent actors until final adjudication, making it important to understand who may be eligible for coverage under the policy and when that coverage may cease. Dilution of limit occurs when the limit available for D&O risk is also used to pay claims on unrelated exposures, decreasing or eliminating the amount of insurance coverage available for the directors or officers.
For directors, a clear picture of the nonprofit’s operations and risk profile is important. Boards are generally viewed as the ultimate risk owners for the organization, and individual directors could make more informed decisions about D&O insurance and indemnification agreements if they better understand potential risks. They must also work to understand the corporate governance and risk-management safeguards in place to protect them as directors and officers outside of the insurance policy. The insurance policy should be a backstop, while sound board practices should be the foundation of director and organizational protections.
An organization’s bylaws may grant a director or officer defense and indemnity for alleged wrongful acts committed in their role as a board member. In the absence of a D&O policy, this protection comes from the organization’s balance sheet. The D&O policy provides financial backing to the balance sheet for this obligation, and it also protects directors and officers in many cases where the organization is legally barred from doing so. Where a nonprofit balance sheet is weak, adequate D&O coverage becomes more important.
Now that you know what to ask, let’s look at how you may be able to better manage some of the risks you might face as a board member. As a potential director, keep in mind the following:
Focus on transparency. You want to work for and support an organization that is transparent and endeavors to share its balance sheet, operations, risk-management program, and the like. This knowledge will empower you to not only do a better job assisting the organization in its day-to-day operations but also help you understand any potential areas of risk.
Understand the coverage available to you. See what insurance coverage is already in place for directors and officers at your organization and retain a copy of the policy for your personal records.
Consult with a personal risk advisor. It may be beneficial for you to discuss your organization’s policy, if any exists, with an outside risk advisor. They may be able to help you better understand any issues or holes in the existing coverage.
Explore your options. Personal insurance policies, such as homeowner and umbrella policies, typically exclude commercial ventures and for-profit board activities. However, personal director liability policies may provide additional coverage specific to board members and that may tie into the corporate D&O policy.
If you’re already on a nonprofit board or thinking about joining one and want help understanding your personal risks or how to do proper due diligence, please reach out. Our team can assist you with a personal risk review and offer guidance on the appropriate insurance for your situation.
Request an insurance review with an experienced Personal Risk Advisor to ensure you're adequately insured for whatever life my bring.
