Nonprofit boards and executives make decisions every day that affect budgets, staff, donors, and the communities they serve. Most of those decisions are thoughtful and made in good faith. Still, a disappointed donor, a former employee, or a regulator can allege wrongdoing, and defending against that claim can be expensive whether or not it has merit. That's where directors and officers (D&O) liability insurance comes in, and why it belongs in every conversation about nonprofit operations management.
D&O insurance helps protect a nonprofit and its leaders against certain claims alleging wrongful acts in their roles, along with the legal costs of defending those claims. Coverage terms vary widely, so boards should understand what their specific policy covers, excludes, and requires.
Most policies protect both the organization and the people who lead it. Depending on the policy, insured individuals may include directors, officers, employees, volunteers, and committee members. Because the definition of an "insured" differs from one policy to the next, it's worth confirming exactly who is included, especially if your nonprofit relies heavily on volunteers.
Coverage generally responds to claims alleging "wrongful acts." Depending on the policy language, that term may include errors, omissions, misleading statements, neglect, and certain breaches of duty. Policies may also cover allegations of mismanaged funds, conflicts of interest, and failure to meet fiduciary responsibilities.
A D&O policy isn't a catch-all. Several exposures often require a separate policy or an added endorsement, usually at extra cost:
Policies also commonly exclude or limit coverage for fraud, criminal acts, illegal personal profit, and other conduct considered uninsurable. How an exclusion applies depends on the policy's wording and the facts of a given claim.
Most D&O policies are written on a claims-made-and-reported basis. In general, a claim must be made against an insured and reported to the insurer during the window the policy specifies. Whether earlier conduct is covered can hinge on the policy's retroactive date, continuity provisions, and prior-knowledge exclusions.
If a policy is canceled or expires, it typically won't cover a claim first made after that point, even if the underlying act happened while the policy was active. Extended reporting period (ERP) coverage can lengthen the window to report certain claims tied to past acts, but it won't cover new wrongful acts.
Keep in mind that a "claim" may include more than a lawsuit. Written demands, administrative proceedings, and regulatory inquiries can qualify, so review your reporting requirements closely.
If your organization receives a claim, or learns of circumstances that could lead to one, consider these steps:
Insurance works best alongside strong governance. The IRS encourages charities to adopt sound policies on conflicts of interest, executive compensation, document retention, and whistleblower reporting, as outlined in its guidance on governance practices for 501(c)(3) organizations. Clear policies, well-documented board decisions, and reliable financial reporting can reduce the likelihood of claims in the first place.
Because policy terms and volunteer immunity laws vary, ask your legal counsel and insurance broker to review your coverage, exclusions, and reporting requirements. As a CPA for nonprofits, GBQ can help you evaluate insurance costs, strengthen internal controls, and explore broader risk-management strategies through our Nonprofit Services & Consulting Team. You may also find this article, Strengthening Nonprofit Governance: Crafting An Effective Board Policy, helpful. Contact GBQ to talk with our nonprofit consulting professionals.
Size doesn't eliminate risk. Any organization with a board, staff, or volunteers can face allegations, and defense costs can strain a small budget.
Often not fully. Employment practices liability is frequently excluded or limited and may require separate coverage.