Despite ones commitment to their cause, many Not-For-Profit Directors and Officers are unaware of the legal ramifications of their work and the possibility of being held personally liable. As a Director or Officer of a Not-For-Profit Organization your personal assets are exposed to risk related to your duties and responsibilities.
The basic responsibility of Directors is to represent the interest of the organization, their members and their constituencies in directing the affairs of the organization. There are three (3) basic duties:
Diligence: to act reasonably, prudently, in good faith and with a view to the best interests of the organizations and its members;
Loyalty: to place the interests of the organization first, and to not use one’s position as a director to further private interests
Obedience: to act within the scope of the governing policies of the organization and within the scope of other laws, rules and regulations that apply to the organization.
Executive Directors and Board members should work to identify their potential risks and set up a plan to reduce or prevent failures in executing their duties. However; even after this exercise is complete there still may be a sense that more protection is needed.
Many Not-For-Profits have indemnity provisions in their by-laws to pay for legal costs and claim judgments/settlements if board members are sued. However, an agreement to indemnify a director is only as good as the financial resources available in an organization. In many cases, the organizations funds are inadequate due to low revenues or high expenses. If the organization does not have the funds to support a long legal battle or a large claim, the Director’s personal assets are exposed.
Every Non-Profit must consider how it might pay for claims if they arise. The remedy to protect the Director’s personal assets is the Directors’ & Officers’ Liability Insurance Policy.
When purchasing Directors & Officers Liability insurance, it is important to review and understand four main points:
Who is covered?
Ensure that past, present and future Directors and Officers are covered. You will also want to include higher level management staff such as the Executive Director and all volunteers, employees, members of committees and even board member spouses. Policies will either describe “insured” narrowly or broadly. In some narrow definitions, coverage is limited to current directors and officers of the organization only. It is important to name as many people and organizations as possible in the definition of insured as many litigation lawyers, when suing, will name as many parties as they can regardless of who is ultimately responsible.
What is the definition of wrongful act?
The definition of wrongful act is fairly important since most policies limit their coverage only to wrongful acts that result in a claim. Most policies define wrongful act in lengthy paragraphs referring to errors, mistakes, or omissions that occur in the discharge of an officer’s or director’s duties. It is important to review the policy exclusions with your broker, as the best policies should NOT have exclusions for any of the following: misrepresentation/non-disclosure, libel and slander, discrimination, defamation, harassment and employment practices including wrongful dismissal.
What is the definition of claim?
Almost all Directors and Officers liability insurance is written on a “claims made” basis. This means that insurance must be in place when a claim is made in order for it to be covered. In other words, it doesn’t matter when the actual event occurred. The policy has to be in force for coverage to respond.
Policy Limits and deductibles
One of the most important parts of a policy is the limit that can be claimed under the policy per claim and in aggregate for a policy term. Limits can be set anywhere from $1,000,000 to $100,000,000. For most Non-Profits a limit of $2,000,000 up to $5,000,000 should be adequate protection.
Defense costs are either included within the policy limits or in addition to policy limits. The best policies pay for defense costs without degrading the policy limit.
Deductibles are the amount of the loss that the insured must contribute to the claim. Many insurance policies charge different deductibles for individuals and organizations. The best policies will only have a deductible applied to the organization.
Not-For-Profit Directors and Officers liability insurance premiums generally start at $500, but can be much higher depending on the organization’s annual revenues and on a risk assessment by the insurer.
Every organization must review its risk exposures and analyze the probability of the board or senior staff’s personal assets becoming exposed to litigation. Not-For-Profits should weigh this risk against the cost of insurance and then work with their broker to place the coverage that is best suited to the organization.
Tips when purchasing:
- Locate an insurance broker with expertise with Not-For-Profits
- Allow sufficient time for a risk assessment and underwriting
- Be sure to fill out application forms with accurate and honest information to avoid
the possibility of misstatements
- Fully disclose the organizations prior losses and provide details on ways in which the organization can avoid future losses
- Negotiate for coverage and pricing
- Make sure that you report any prior incidences that might potentially give rise to claim
Lee Fulsher, BA, CAIB
Shaw Sabey & Associates Ltd.