Nonprofit Insurance Program

Directors & Officers: Are they Protected by Your Nonprofit Insurance?

By Alexa Connelly
October 04, 2012

Directors & Officers: Are they Protected by Your Nonprofit Insurance?


Non-Profit organizations, by principle are organizations that use financial means to reach certain goals either through a plan of expansion, functionality of that entity. When we think of non-profits (NPO’s), usually we connect them with philanthropy, and goodwill.    Through NPO’s surpluses, board members can be paid, or volunteers are added.  NPO’s like most corporations have bylaws (rules), or articles of incorporation.  These are used to establish what state they plan to setup and most importantly do business.  Rarely do we see the operational and logistical needs to run a successful NPO. Consequently, the appointment of Directors and Officers to hedge a growing NPO brings to light avenue- NPO Directors & Officers insurance.  Insurance, frankly, is a means to protect property either through bonds, deeds, collateral and pledges.  When we speak about Director & Officers Insurance, what are we really considering?  The responsibility? Or the terms in which the director and officers are employed.  Too look at this in terms of black and white, would be folly, because how Directors & Officers Insurance is being applied would give us answers to both these questions.

Moreover there are two types of corporate lawsuits that can come against an NPO, firstly a derivative lawsuit.  Simply this is lawsuit deals with the process of arbitration between the company and board members [mishandling of funds.]  Secondly, direct or third-party lawsuits.  Direct and third-party lawsuits usually include the employee, or someone not affiliated with the company, regarding no bodily injury, [termination or discrimination].  If we look at the nature of these two claims, most directors and officers would fall under the second lawsuit.  Generally though, most officers over the NPO are covered. Insurance mentioned at the outset, is meant to secure, in various forms, albeit a company, or car.  In this case directors and officers are covered with insurance, in theory.   Moreover, that is why those who request Directors & Officers Insurance should prudently scour each line in their terms and agreements. Numerous Directors & Officers insurance policies will leave out key facets in how employees can actually legally receive either non-compensation or control of the NPO. The bulk of the claims come against NPO’s directors included, make up the majority of legal entanglement that NPO’s find themselves.  However, most claims never reach trial due to legal fees, and amount of time need to squelch a NPO on grounds for the failed mission to stand true to their vision.  Directors & Officers Insurance is great legislation for NPO’s because it does what insurance is designed to do, protect assets.

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