Good intentions aren’t a defense: D&O insurance for nonprofits
Nonprofit leaders frequently make consequential decisions about money, people and programs. But even well-informed and well-intentioned decisions can lead to allegations of wrongdoing. Directors and officers (D&O) liability insurance can help protect your organization and its leaders against certain claims and legal expenses. But coverage varies, so you need to understand what such policies cover and exclude, as well as what they require of your organization.
Who and what it protects
D&O policies are designed to shield both your organization and its key individuals, which may include directors, officers, employees and even volunteers and committee members. Exactly who qualifies as an insured depends on the policy. Coverage commonly applies to claims alleging wrongful acts, a term that may include errors, omissions, misleading statements, neglect and certain breaches of duty. D&O insurance can also protect your organization and its leaders against allegations involving mismanagement of funds, conflicts of interest and failure to fulfill fiduciary duties.
But employment practices, professional liability, cyber risk, fiduciary liability and crime exposures may require separate coverage or endorsements (at an additional cost). Policies commonly exclude or limit coverage for losses arising from fraud, criminal conduct, illegal personal profit and other matters generally deemed uninsurable. However, exclusions depend on a policy’s terms and the facts of a particular claim.
If a claim arises, notify your insurer promptly and obtain any required consent before retaining legal counsel or agreeing to a settlement. Keep in mind that defense costs may reduce the policy limits available for settlements or judgments.
The clock’s ticking
D&O insurance is commonly written on a claims-made-and-reported basis. Usually, claims must first be made against the insured and reported to the insurer within the period specified by the policy. Coverage for earlier conduct may depend on the policy’s retroactive date, continuity provisions and prior-knowledge exclusions.
Canceled or expired policies typically don’t cover claims first made when the policy is inactive, even if the alleged act occurred when it was active. Extended reporting period (ERP) coverage may extend the reporting window for certain claims involving earlier wrongful acts. But ERP doesn’t provide coverage for new wrongful acts. Because claims may involve not only lawsuits but also demands, administrative proceedings or regulatory matters, review your policy’s reporting requirements carefully and notify your insurer promptly when circumstances may give rise to a claim.
Balance protection and cost
The right D&O coverage can protect your nonprofit’s mission and the people entrusted with advancing it. Because policy terms and immunity laws vary, ask your legal counsel and insurance broker to review your specific policy’s coverage, exclusions and reporting requirements. Contact us for help evaluating your current insurance costs and exploring general risk-management strategies.
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