As an Increasing Target for Claims, Nonprofits Seek More D&O Coverage

Getting involved in a worthy cause is a good thing.

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

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

“A significant difference is that non-profits typically don't have the same level of balance-sheet protection to support litigation, as compared to a private or public institution,” says Elda Martocci, underwriting director for Travelers' bond and financial products.

As awareness of their exposure on this front increases, more nonprofits 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, says he wrote a piece on nonprofit D&O years ago when he was starting his practice.

The focus of his consultancy has since shifted to banks, but Simmonds says he still gets three calls per week from people—mostly involved in nonprofit startups—looking to learn more about nonprofit D&O, and he offers them advice on how to approach an agent to find coverage.

Simmonds says he gets another two or three calls per month from people thinking about serving on a nonprofit board of directors. “They are worried about facing personal liability, and they should be,” he says. “I normally tell them there is too much risk to serve out of the goodness of your heart on a board of a nonprofit without D&O.”

Simmonds' message must be getting out. The concerns of potential board members are often the spark that leads to a call to agents or brokers for a quote, says Pollaro: “Prospective members will look at the coverage and refuse to sit on the board until they purchase more limits.”

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

William R. Henry Jr., executive director of Volunteers Insurance Service Association Inc., a risk-purchasing group operating nationally, says, “It is also a great idea for board members to have a Personal Umbrella [policy].

“Your organization can be sued for a wrongful act by anyone with any interest in the chapter's activities,” he adds. “Without nonprofit D&O coverage, you must pay for your own defense, even if you are proven blameless.”

And the list of possible reasons for a claim is long and growing, especially as government agencies increase their oversight activities.

“Potential liabilities run the gamut,” observes Martocci of Travelers, “and can include employment-related matters; civil-rights issues; fiduciary-duty breaches; fund misappropriation; improper conduct of volunteers or employees; and government claims involving conflicts of interest and antitrust exposure, particularly for trade and professional associations.”

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

Furthering that risk is the fact that board members may still be liable even if they were not present when a potentially actionable decision 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 to discontinue operations,” Norman says.

LITIGIOUS CLIMATE INSPIRES PROACTIVE APPROACH

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

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

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

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

In Massachusetts, for instance, the attorney general plans to file legislation to prohibit nonprofit health insurers from paying board members.