Is D&O insurance for nonprofits necessary?

Published April 26, 2019

Business people in a meeting at the office

Director of Business Development

While nonprofit organizations rely on a broad range of benefactors for the gifts of time, talent and treasure, most are especially dependent on their directors, who typically contribute all three kinds of gifts  often in substantial amounts. Serving on a nonprofit board is a great responsibility.

In turn, it's the responsibility of nonprofit leaders to protect their board members — and themselves — from the risks that come with making major decisions on behalf of the organization. That's why there's Directors and Officers Insurance.

BoardEffect is a company that designs software and provides content that enables boards to work with greater efficiency and governance. In a May 2018 blog post titled "The Importance of D&O Insurance for Nonprofit Boards," BoardEffect offers the opinion that "nonprofit organizations need D&O Insurance more than for-profit corporations."

The post offers as evidence a survey by the Insurance Information Institute (III), which found that 31 percent of companies had a D&O claim against them within the past five years, and of those companies, 58 percent were nonprofits.

What does D&O insurance cover?

As the III notes, there are several elements to D&O insurance for nonprofits, providing protection against claims targeting either organization leadership, the organization itself or both. Examples include:

  • creditor or donor suits over mismanagement or dereliction of fiduciary duties
  • misrepresentation in an annual report
  • decisions exceeding the authority granted to an organization officer
  • failure to comply with regulations or laws
  • employment practices and HR issues
  • cyber liability.
While some of those claims involve criminal or at least unethical behavior, others may be the result of a mistake by a well-meaning director. And, let's face it, nonprofits frequently recruit directors who have more passion for the cause than they do experience with board governance.

Benefits of D&O insurance

Nonprofit D&O Insurance_Page_1Zywave, Sylvia Group's partner in offering the MyWave Connect portal to Business Insurance and Employee Benefits clients, offers a flier in its "Coverage in Action" series on claim scenarios in which D&O insurance has provided protection for nonprofits.

The flier also provides explanations of four key benefits of D&O insurance for nonprofits:

  • legal cost reimbursement
  • flexible coverage limits
  • protection beyond indemnification
  • peace of mind.

To view the downloadable and printable document, click on the image at right.

Cost-benefit analysis

Cost is a concern for all businesses, but especially for nonprofits, most of which are in perpetual fundraising mode. But D&O insurance for nonprofits typically is an affordable and cost-effective form of protection, particularly for smaller organizations.

In an interview with Blue Avocado, a publication devoted to coverage of issues facing nonprofits, Nonprofits Insurance Alliance Group President and CEO Pamela Davis said that average D&O claims against nonprofits cost $35,000 to resolve, with 1 in 10 costing more than $100,000. The cost of D&O insurance for nonprofits, Davis said, ranges from about $600 a year for a nonprofit with no employees to between $4,000 and $5,000 annually for organizations with 50 employees.

It's figures such as those that led BoardEffect to conclude:

"Nonprofit boards that fail to protect their organizations with a D&O insurance policy may find that the cost of just one claim is far larger than the cost of any insurance premiums they would have paid, if they had purchased a D&O insurance policy."


About Mike Isbister and Sylvia Group

Mike Isbister_retouchedThroughout his 30-year career in sales and service, Mike Isbister has achieved success by combining analytics and action, recognizing that having meaningful data is important — but only if you know what to do with it. The analytics-plus-action approach works not only for Mike and his team but also for Sylvia Group clients. Through the SPS process of compiling and breaking down data, they’re better able to analyze needs and exposures, review claims to determine risk-management solutions, and design comprehensive, cost-effective insurance programs.

CONTACT MIKE ISBISTER

A repeat winner as "Best Insurance Agency" in the SouthCoast Media Best of the Best Awards program, Sylvia Group helps businesses and individuals protect their future by designing insurancebenefits and financial planning programs. We’re a locally owned agency known for our commitment to our clients and our community, as well for our industry expertise. Founded in New Bedford, MA, in 1950, headquartered in neighboring Dartmouth, and serving businesses and individuals throughout Massachusetts, Rhode Island and beyond, Sylvia Group is certified as a Woman Owned Business Enterprise with the Massachusetts Supplier Diversity Office and has the distinction of being the first six-time recipient of the Five Star designation awarded by the Massachusetts Association of Insurance Agents (MAIA) for all-around agency excellence. 

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