Posted on Wednesday, September 11, 2013
Directors and officers (D&O) insurance is not required by law but is a good idea for nonprofit organizations to purchase to protect board members.
Most states already have some form of protection for nonprofit board members through limited statutory immunity under certain circumstances. According to Indiana code, a director is not liable for an action taken or not taken as a director unless the:
(1) director has breached or failed to perform the duties of the director’s office in compliance with this section [Indiana Code 23-17-13]; and
(2) breach or failure to perform constitutes willful misconduct or recklessness.
For immunity to apply, the director must act:
(1) In good faith.
(2) With the care an ordinary prudent person in a like position would exercise under similar circumstances.
(3) In a manner the director reasonably believes to be in the best interests of the corporation.
Statutory immunity may only apply to certain types of cases; however, so additional protection for nonprofits and their board members should be obtained through D&O insurance.
Some individuals may be reluctant to serve on boards that do not have D&O coverage in place. It is already difficult for nonprofit organizations to attract qualified board members; don’t let the lack of insurance deter potential board members. Also, some grants and government agencies may require D&O insurance to receive funding.
Board members are volunteers that often make difficult decisions. D&O insurance provides protection from damages resulting from actual or alleged wrongful acts, errors, financial mismanagement, misleading information, and negligence. It may also include coverage for employment related lawsuits, such as discrimination or wrongful termination.
D&O insurance is not professional liability insurance. Professional liability insurance (errors and omissions or malpractice insurance) covers liability related to performance failures and negligence with respect to products and services, not the performance and duties of the board.
The cost of D&O insurance varies by provider, amount of coverage provided, prior claims, etc. As part of the organization’s risk management process, the board should review its insurance coverage to ensure it has the proper amount in place.
Posted by: Carrie Minnich, CPA
Posted in Mission Minded Nonprofits
Disclaimer: The information contained in Dulin, Ward & DeWald’s blog is provided for general educational purposes only and should not be construed as financial or legal advice on any subject matter. Before taking any action based on this information, we strongly encourage you to consult competent legal, accounting or other professional advice about your specific situation. Questions on blog posts may be submitted to your DWD representative.