Q. A member of our committee has suggested that we should take out D&O Insurance . We are a small charity with limited funds. Is such insurance worth it?
A. Please note that we are not legal or financial experts but we would suggest that all insurance is a waste of money … until you need to make a claim!
But seriously, we asked a friend who understands the subject a little better than we do. Her response:
Directors and Officers (D&O) insurance for non-profit entities, such as charities, operates similarly to how it does for for-profit corporations, but it is tailored to address the specific needs and risks associated with non-profits. Here’s how it typically works:
- Coverage Scope:
- Personal Liability: Protects the personal assets of directors, officers, (and sometimes trustees, volunteers, and employees), from claims alleging wrongful acts while managing the non-profit.
- Legal Fees and Costs: Covers legal defence costs, settlements, and judgments arising from claims made against the insured individuals or the organisation.
- Wrongful Acts: Includes coverage for a variety of wrongful acts, such as mismanagement of funds, employment practices (e.g., wrongful termination, discrimination, harassment), failure to comply with regulations, and breach of fiduciary duties.
- Who is Protected:
- Board Members and Officers: The primary individuals covered are the directors and officers of the non-profit.
- Extended Coverage: Policies often extend to employees, volunteers, and the organisation itself for specific claims.
- Types of Claims Covered:
- Employment Practices: Claims related to employment issues, such as wrongful termination, harassment, and discrimination.
- Mismanagement: Claims arising from allegations of mismanaging the organisation’s funds or resources.
- Regulatory Actions: Coverage for investigations and legal actions by regulatory bodies.
- Breach of Duty: Claims alleging breach of fiduciary duty, errors in judgment, or failure to fulfill organisational responsibilities.
- Policy Structure:
- Side A: Covers the directors and officers when the organization cannot indemnify them (e.g., if the organization is insolvent).
- Side B: Reimburses the non-profit when it indemnifies its directors and officers.
- Side C: Protects the organization itself when it is sued alongside its directors and officers.
- Importance for Non-Profits:
- Attracting and Retaining Leadership: Helps attract and retain qualified individuals to serve as directors and officers, as it provides them with protection against personal financial loss.
- Financial Protection: Shields the organization and its stakeholders from financial devastation due to lawsuits and legal claims.
- Risk Management: Enhances the overall risk management strategy of the non-profit by addressing potential legal exposures.
- Premiums and Limits:
- Premium Costs: Premiums for D&O insurance for non-profits are generally lower than those for for-profit entities, reflecting the different risk profile.
- Coverage Limits: The policy limits (i.e., the maximum amount the insurer will pay) are chosen based on the size, scope, and risk profile of the non-profit.
In summary, D&O insurance for non-profit entities such as charities provides essential protection for the personal assets of their leadership and financial stability of the organization, allowing them to focus on their mission without undue fear of legal repercussions.
See also the following resources on this site: Services for non-profits and ‘To incorporate or not?’