Getting involved in a worthycause is a good thing.

Receiving court documents over a lawsuit related to one'sinvolvement in a nonprofit organization is not.

The fact is, a nonprofit organization and its directors andofficers face many of the same risks as a for-profit board ofdirectors—and might have even more difficulty fending offclaims.

“A significant difference is that non-profits typically don'thave the same level of balance-sheet protection to supportlitigation, as compared to a private or public institution,” saysElda Martocci, underwriting director for Travelers' bond andfinancial products.

As awareness of their exposure on this front increases, morenonprofits have become interested in D&O Liability insurance,according to Sal Pollaro, managing director for Glen Allen,Va.-based Markel Corp.

LOOK BEFORE YOU LEAD

Scott Simmonds, a business-insurance consultant from Maine, sayshe wrote a piece on nonprofit D&O years ago when he wasstarting his practice.

The focus of his consultancy has since shifted to banks, butSimmonds says he still gets three calls per week from people—mostlyinvolved in nonprofit startups—looking to learn more aboutnonprofit D&O, and he offers them advice on how to approach anagent to find coverage.

Simmonds says he gets another two or three calls per month frompeople thinking about serving on a nonprofit board of directors.“They are worried about facing personal liability, and they shouldbe,” he says. “I normally tell them there is too much risk to serveout of the goodness of your heart on a board of a nonprofit withoutD&O.”

Simmonds' message must be getting out. The concerns of potentialboard members are often the spark that leads to a call to agents orbrokers for a quote, says Pollaro: “Prospective members will lookat the coverage and refuse to sit on the board until they purchasemore limits.”

That concern and caution is more than justified: The personalfinances of directors and officers are on the line if a nonprofitis sued and it lacks sufficient insurance to cover any damages,Martocci notes.

William R. Henry Jr., executive director of Volunteers InsuranceService Association Inc., a risk-purchasing group operatingnationally, says, “It is also a great idea for board members tohave a Personal Umbrella [policy].

“Your organization can be sued for a wrongful act by anyone withany interest in the chapter's activities,” he adds. “Withoutnonprofit D&O coverage, you must pay for your own defense, evenif you are proven blameless.”

And the list of possible reasons for a claimis long and growing, especially as government agencies increasetheir oversight activities.

“Potential liabilities run the gamut,” observes Martocci ofTravelers, “and can include employment-related matters;civil-rights issues; fiduciary-duty breaches; fundmisappropriation; improper conduct of volunteers or employees; andgovernment claims involving conflicts of interest and antitrustexposure, particularly for trade and professionalassociations.”

Of the list above, the misuse offunds is one of the more common claims against boards, notesShelley Norman, head of private and nonprofit management liabilityfor financial lines in the U.S. and Canada for Chartis.

Furthering that risk is the fact that board members may still beliable even if they were not present when a potentially actionabledecision was made as to how to spend the money.

Defending and ultimately paying out against such claims can“drain private and nonprofit organizations until they have todiscontinue operations,” Norman says.

LITIGIOUS CLIMATE INSPIRES PROACTIVEAPPROACH

Tom Marchetti, vice president at specialty-insurance broker andmanagement-consulting firm Ames & Gough of McLean, Va., saysnonprofit buyers are calling more because they are taking a“holistic risk-management” approach.

“They discover gaps in coverage or the need to have it,” heexplains. “Or they want to increase limits.”

Another factor in this growing interest in nonprofit D&O isan increase in lawsuits against charities. As Marchetti observes,“We live in a litigious society.”

Norman says attorneys general have targeted nonprofits to try toprotect communities from improper use of funds: “They aredefinitely keeping an eye out in this industry. Nonprofits aresupposed to serve the community.”

In Massachusetts, for instance, the attorney general plans tofile legislation to prohibit nonprofit health insurers from payingboard members.