Essential Protection for Nonprofit Leadership
Serving on a nonprofit organization’s board of directors can be a rewarding and fulfilling experience, allowing you to make a significant contribution to your community. Many business leaders serve on boards throughout their career, gaining countless benefits and encountering new opportunities for leadership.
The responsibilities for board members of nonprofit organizations mirror those of private and public companies. Though serving on a nonprofit organization is often a volunteer position, directors and officers are expected to meet strict standards of conduct.
Nonprofit corporation law mandates that directors and officers demonstrate diligence, loyalty, and obedience in the performance of their responsibilities. Failure to do so may result in claims against directors or officers.
Directors and Officers Liability Insurance
Directors and Officers (D&O) insurance is a valuable layer of protection for the personal assets of directors and officers as well as their estates or spouses. Coverage also extends to the entity allowing protection of the organization’s balance sheet. A properly executed Directors and Officers Liability program is attractive when recruiting and retaining qualified members. D&O insurance policies cover the nonprofit’s Executive Officers and Board of Directors for claims made against them in their leadership roles. Coverage extends to the organization itself for alleged breach of duty, errors, misstatements or misleading statements, negligence, or another act or omission in the performance of their management duties. Nonprofit D&O policies can also include coverage for claims involving violations of employment practices laws; with the most common exposure affiliated with nonprofits is the mismanagement of funds, where the largest payouts are seen.
In a settlement situation, these exposures hold the power to position an organization’s Directors’ and Officers’ personal assets at risk. A class action lawsuit from stakeholders for a public misstatement can be substantial. The costs to defend allegations of unfair business practices have the potential to wipe out organizations assets quickly. Allegations can include claims from donors, beneficiaries, regulatory bodies, members, third-party affiliates.
Nonprofit D&O Claim Scenarios
Below are some recent actual claim scenarios experienced by nonprofit organizations.
Scenario 1: A charitable nonprofit organization applied for, and received, government funding. The government conducted an audit and determined that the government funds were not used for the purposes described in the funding application. The government commenced action seeking damages due to the alleged negligent misrepresentations in the application in violation of the False Claims Act. The claim was resolved by way of a negotiated settlement. Costs incurred to defense the claim totaled approximately $300,000.
Scenario 2: Former employees filed suit after allegedly being subjected to egregious sexual misconduct by the Executive Director of a social service organization. The organization also had financial issues that would have caused a public relations problem if the matter proceeded to trial. The matter settled for $645,000, with an additional $27,190 in defense costs.
Scenario 3: The United States Department of Justice filed a lawsuit against a nonprofit organization alleging violation of the False Claims Act. The lawsuit required the organization to compile and produce hundreds of thousands of documents to the government as part of the lawsuit. The organization incurred approximately $250,000 in defense costs before the government agreed to discuss settlement. The case ultimately settled for a total of $400,000.
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