Protect Directors and Officers From Legal Liability

Copyright 2022

It's an age of personal responsibility. Even if your nonprofit's board members do everything in their power to make good governing decisions, legal liability can potentially lead to their financial ruin. Here's how to protect your board.

The Allocation Complication

One of the most misunderstood aspects of directors' and officers' insurance is allocation: What's covered and what isn't? Who's insured and who isn't? You need to determine how to divide up responsibility for defense costs and settlement between the directors and officers and your organization

Allocation is required when a policy doesn't provide "entity" coverage to the organization and a lawsuit is brought against directors and officers and the organization. In that situation, a policy would cover the defense and settlement expenses of the individuals, but not of the organization.

It's personal

Being an effective board member takes time, effort and diligence. Unfortunately, even dedicated board members may be at financial risk if a disgruntled party sues and holds them individually liable for their actions.

Suppose you run a mentoring program and a parent sues because one of the mentors has a history of drug abuse. Your directors could be individually liable for your charity not performing strict background checks on volunteers.

Claims that have been filed against not-for-profits and their officers and directors include those that involve:

  • Employee discrimination,
  • Wrongful termination,
  • Sexual harassment,
  • Hiring decisions,
  • Promotions and compensation,
  • Activities in which volunteers are injured, and
  • Donors who feel their contributions have been misused or mismanaged.
Reducing the risk

Liability risks are particularly keen for nonprofits and their board members because they don't necessarily have the money to mount a legal defense and pay settlements, which can run into the millions. These sums can devastate your organization and the personal finances of its directors and officers.

To provide protection, purchase a directors' and officers' insurance policy. Or, if your general liability insurer allows it, bundle directors' and officers' coverage into your current insurance package. In the event of litigation, this insurance may reimburse your organization for indemnification expenses and make payments to directors who aren't reimbursed for legal expenses. Such coverage may include employment cases, which make up 50% of all claims against boards.