February 27, 2025

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What duties do the directors and officers of a nonprofit have?

Just because an organization is a nonprofit doesn’t mean its directors and officers are free from duties or liabilities. In a nonprofit, directors and officers have certain duties and responsibilities to act in a manner most beneficial to the nonprofit. These are known as their fiduciary duties.

Some of the key duties of a director or officer include the duty of care, the duty of loyalty, and the duty of obedience. When acting as a director or officer, there are some situations when one can be subject to personal liability for one’s actions. If uninsured, one lawsuit can have a huge impact on a nonprofit organization. Luckily, Directors and Officers insurance (“D&O insurance”) allows for a way to mitigate the damage in scenarios like this.

What is Directors and Officers insurance for nonprofits?

D&O insurance for nonprofits is a type of liability insurance that provides financial protection for the personal assets of directors and officers of a nonprofit organization. This coverage applies in the event directors and/or officers of the organization are sued for alleged wrongful acts while fulfilling their duties on behalf of the organization. This insurance coverage helps protect individual board members and officers from personal financial liability arising from decisions made on behalf of the organization.

Who does D&O insurance cover?

D&O insurance typically covers directors, officers, trustees, and sometimes employees of an organization; whether it also covers managers can depend on the specific policy and the roles and responsibilities of those managers within the organization.  

In some cases, D&O insurance policies may extend coverage to certain types of managers, particularly if they have significant decision-making authority or are involved in governance-related activities. However, coverage for managers may vary depending on the insurer and the policy terms. It is important to discuss this with your insurance agent when choosing coverage for your organization.

What types of claims can be pursued against directors and officers of a nonprofit?

Directors and officers of nonprofits can be held personally liable for a range of issues, including financial mismanagement, breach of fiduciary duty, employment-related violations, tax issues, fraud, misrepresentation, administrative issues, and other legal matters. D&O insurance helps mitigate these risks by covering legal expenses, settlements, and judgments that may arise from lawsuits or claims against directors and officers. [Note whether certain types of claims are regularly excluded, such as member and director derivative actions]

Why should nonprofits maintain D&O insurance?

If a nonprofit’s assets do not cover any damages owed to a party making a claim, a court may look to the personal assets of the directors and officers to satisfy a judgment. Personal assets may include a director or officer’s house, car, or bank account.  

Not only can directors and officers find themselves personally liable, which can be a major financial burden, but the organization will also have to pay the legal fees associated with a lawsuit. This alone can be enough to make a nonprofit financially unstable. The good news is that D&O insurance can cover legal fees, settlements, and judgements.

When a nonprofit offers D&O insurance, the nonprofit makes itself a more desirable organization to potential board members. Highly talented and qualified directors are more likely to pursue a leadership position in a nonprofit when they are offered this extra layer of protection. Many prospective directors are likely to avoid nonprofits that do not offer D&O insurance because they run the risk of being held personally liable for any potential lawsuit against the nonprofit.

Also note that certain state statutes that protect directors of nonprofits from liability may condition those protections on the organization having liability insurance. [Look for an example or two to confirm – Check California]

Finally, most organizations provide broad indemnifications to provide for defense and potential liability of the actions of directors. Having D&O insurance helps the organization to have the funds to cover the indemnification costs if an issue arises.

What should a nonprofit consider when choosing coverage?

When choosing D&O insurance for a nonprofit organization, you should consider the following:

1. Assess Your Needs: Determine the level of coverage your nonprofit requires. Consider factors such as the size of your organization, the nature of its activities, the potential risks it and the assets you need to protect. Reviewing this with a lawyer, insurance agent, and/or accountant is a good idea.

2. Research Insurance Providers: Look for insurance companies that offer D&O insurance for nonprofits. You can search online, ask for recommendations from other nonprofits or industry associations, or consult with an insurance broker who specializes in nonprofit insurance.

3. Get Quotes: Contact several insurance providers or brokers to request quotes for D&O insurance coverage. Provide them with relevant information about your organization, such as its size, annual budget, activities, and any previous insurance claims.

4. Compare Coverage Options: Review the quotes you receive from different providers carefully. Compare what is covered, as well as the coverage limits, exclusions, deductibles, and premiums to determine which policy offers the best value for your organization.

5. Customize Your Policy: Work with the insurance provider or broker to customize your D&O insurance policy to meet your organization's specific needs. You may need to adjust the coverage limits, add endorsements or riders, or tailor the policy to address particular risks or concerns.

6. Review Policy Terms: Carefully review the terms and conditions of the insurance policy before purchasing it. Pay attention to any exclusions, limitations, or conditions that may affect your coverage.

7. Purchase Coverage: Once you have selected a D&O insurance policy that meets your organization's needs, complete the necessary paperwork and pay the premium to activate the coverage.

8. Moniter and Renew: Keep track of your D&O insurance coverage and renew it annually to ensure your organization remains protected against potential liabilities and risks.

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The risks associated with a claim or lawsuit could be devastating to a nonprofit. D&O insurance can help mitigate these risks by providing protection for directors and officers while also encouraging top-tier candidates to take leadership roles within your organization.  

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