In a recent survey by Watson Wyatt Company, 36% of the 726 associations and other nonprofit organizations surveyed had had a directors and officers liability claim in the past ten years – more than double the percentage that had had a claim in the preceding ten years. The greatest increase of claims activity is among smaller organizations.
The same survey indicated that the average defense cost for a D&O claim is $114,000. What would an unexpected and uncovered expense of $114,000 do to your organization, and your individual directors, if you could not indemnify them?
Your organization’s commercial general liability (CGL) policy does not cover “wrongful acts,” in all likelihood. Its coverage is limited to bodily injury and property damage.
The federal Volunteer Protection Act of 1997 does not eliminate the need for nonprofit D&O insurance. That law often does not protect the organization itself, or staff. Nor does it protect the individual volunteer against allegations of violations of federal civil rights laws (the most common source of claims), or against claims of “gross negligence,” or against automobile-related liability. Plus, even if a volunteer is totally blameless, he or she still can be sued, and will incur defense costs.
State “immunity” statutes vary, and often protect the nonprofit only if D&O insurance has been purchased.
Your organization can be sued for a wrongful act by anyone with any interest in the chapter’s activities. These can include employees, members, one director against another, vendors, governmental authorities and others. Without nonprofit directors and officers coverage, you must pay for your own defense, even if you are proven blameless.
Nonprofit D&O coverage is much less than it would be in the case of for-profit organizations.
Jon Jepsen has been in the insurance industry since 1994 working as a broker, agent, and risk manager. As a specialist in property and liability exposures, he has become one of the premier experts on insurance and risk management issues pertaining to nonprofits, technology firms, beauty salons, art galleries, property managers, religious institutions, and the LGBT community.