Yes! Your Nonprofit Needs Directors & Officers Insurance

Nonprofit board service is a noble endeavor and a chance to contribute to a cause you believe in. However, the very real personal risks get much less attention. Successful nonprofits make informed, strategic decisions about risk management. 

Let's dissect a critical, yet often overlooked, aspect of board member liability: Directors & Officers (D&O) liability insurance.

The Elephant in the Boardroom: Directors & Officers (D&O) Insurance

Imagine this: a disgruntled former employee sues your nonprofit for wrongful termination.

Or perhaps a donor alleges misuse of funds.

In these situations, the nonprofit itself is a target, but so too are individual board members. Their personal assets could be on the line.

This is precisely where D&O insurance steps in. It’s designed to protect the personal assets of board members (and officers) against lawsuits related to their board service. 

It should also cover the cost of legal defense; these costs would otherwise have to get paid by the organization and/or individual board members. 

The "Co-Owner" Mindset: Beyond Philanthropy

Many board members view their role primarily through a philanthropic lens – donating time, expertise, and often, financial resources. While these contributions are invaluable, it’s crucial to adopt a more robust perspective: that of a co-owner. Legally speaking, when you join a nonprofit board, you assume a position akin to a co-owner in a business, especially when it comes to responsibility. The critical distinction, of course, is that you don't receive any financial benefit or equity.  (Sorry.)

So you can think about your board service this way: would you co-own a for-profit business where your fellow owners were lackadaisical about risk and basic insurance coverage? Or would you demand that the business protect itself and its owners from foreseeable risks?

The same logic applies, with even greater urgency, to nonprofits. Board members have a fiduciary duty – a legal and ethical obligation to act in the best financial interests of the organization. This includes ensuring adequate insurance coverage, not just for D&O but for general liability, property, and any other relevant risks. Overlooking these basic protections isn't just irresponsible; it can have severe personal repercussions.

The Red Flag of Organizational Immaturity: No D&O Absence

If I had a dollar for every time I’d heard a board member remark that they could recruit some high-profile, influential community member to join the board I could make a very, very generous gift to my favorite nonprofit.

But you’ll have a hard time convincing that person to join your board if you don’t carry D&O.  They won’t want the personal liability and they’ll also interpret its absence to mean the organization is immature.  In nonprofits, it’s almost like having your mommy still pick out your clothes and dressing you.

Take note:  the absence of D&O insurance can also represent a red flag to potential funders.  It suggests a broader pattern of neglecting foundational elements of sound organizational management. There's nearly a 100% chance that if D&O is missing in this scenario, other critical operational "best practices" are also absent. This could range from insufficient financial controls to unclear lines of authority, inadequate HR policies, governance issues, founder’s syndrome, unprofessional behavior, or a general lack of transparency.

Protecting Yourself, Your Family, and Your Assets

This isn't just about the organization; it's also about you. Your personal financial well-being, and by extension, that of your family, is at stake. Even if you don't believe you have substantial personal assets, potential legal settlements can lead to crippling debt. Judgments against individual board members can result in liens on future earnings, wage garnishments, and a devastating impact on your credit score, making it difficult to secure loans, housing, or even certain types of employment.

What about “Good Samaritan” Laws?

While the "Good Samaritan" laws in some states offer a degree of protection for volunteer board members of nonprofits, these protections are often limited and vary significantly.

They typically shield volunteers from liability for simple negligence but not for gross negligence, willful misconduct, or certain types of intentional wrongdoing.

Relying solely on these statutes is a risky proposition; they are not a substitute for comprehensive D&O insurance. 

Next Step:  Advocate for D&O Insurance

Get a bid for D&O insurance.  I’ve seen policies for small and start up nonprofits that cost less than $1,000 per year.

Then talk to your fellow board members.  Educate them on their risks and responsibilities.  They may be receptive and ready to make D&O insurance an organizational priority.

Plan B:  Pay for it Yourself

If your fellow board members aren’t ready, can you pay for the insurance yourself?

This could form part (or all) of your annual gift to the organization.

Does this sound unconventional?  Maybe it is, but I’ve actually done it myself!  And for small nonprofits, particularly those just starting out or those with limited operating budgets, the cost of D&O insurance can feel prohibitive.  

By personally underwriting this essential protection, you’re not just making a financial contribution; you’re directly mitigating a significant risk for the entire board and, by extension, the organization. It's a tangible demonstration of your commitment to the organization's sustainability and the well-being of its leadership. This willingness to step up can also serve as a powerful signal to other potential board members about the importance of sound governance and financial prudence.

Plan C:  Resignation 

Despite your best efforts, you might find yourself on a board that isn't upholding its fiduciary responsibilities, where the risks outweigh the benefits, or where aspects of organizational immaturity come to weigh more on you than your dedication to the organization or the mission.

In such cases, resignation becomes a necessary, albeit often difficult, decision. If you choose this path, absolute clarity and a meticulous paper trail are paramount.

My mom once found herself in this situation and had to resign.  Although the organization had D&O insurance, the organization had a number of blind spots, risks, and just poor management. As a nonprofit leader herself, she worked hard to help her fellow board members to understand the risks to the organization and themselves if they didn’t change their ways.  When they made clear that they didn’t want to rock the boat and resented her “stirring up trouble,” she resigned.  Not long afterwards, massive fraud came to light! 

For that reason, if you do choose to resign, make it in writing and create a clear paper trail:

• Email your resignation to the board chair and other officers

• Also send them a physical letter

• Be sure to clearly state that you are resigning and the effective date

• Make sure that your resignation gets recorded in the minutes of the next board meeting (including getting a copy of those minutes for yourself)

Why go to this much trouble?  Because if it isn’t clear when your board service ended, you could be held liable for anything bad that happens such as fraud, a lawsuit, and the like.  You want to be fully removed, in a way that’s legally clear, should anything “hit the fan.”  Otherwise, you could find yourself roped into problems that happened long after you thought your board service had ended. 

Pro Tip:  Don’t Fall Asleep at the Wheel

Even if you have D&O insurance, that doesn’t mean you can take a nap when it comes to your board responsibilities. 

The courts don’t look kindly on that sort of behavior and neither will your insurance company.

Pro Tip: Fully Addressing Board Risk

While D&O insurance is fundamental, a truly mature nonprofit and its board will adopt a variety of strategies to mitigate and manage risk. These include:

• Robust Financial Oversight: Regular, transparent financial reporting and a strong finance committee are essential. Board members should be asking probing questions about financial statements, budgets, and cash flow and should have a strong sense of the organization’s financial health.

• Comprehensible Financial Reports:  In a world where 93% of American Adults have math anxiety [INSERT LINK], successful nonprofits use graphic dashboards to engage their leaders and make key measures of financial health accessible to everyone.

• Financial Education:  Savvy nonprofits educate their key and aspiring leaders on the basics of nonprofit financial reports, fiduciary duties, budgeting, compliance, and financial health.  This frequently involves engaging someone who is skilled at communicating these concepts without jargon and who is skilled at presenting these concepts to non-experts [INSERT LINK]

• Clear Policies and Procedures: Well-defined policies for everything from conflicts of interest to whistleblower protection, donor privacy, and human resources are critical. These provide a framework for ethical conduct and reduce the likelihood of legal challenges.

• Succession Planning: For both the executive director and key board leadership roles, clear succession plans reduce vulnerability during transitions.

• Strategic Planning: A clear strategic plan, regularly reviewed and updated, ensures the organization is focused and aligned, minimizing the risk of mission drift or ineffective use of resources.

• General Board Education and Training: Ongoing education for board members on their legal duties, ethical obligations, and the specific nuances of nonprofit governance strengthens the entire board's capacity for effective oversight.

• Regular Legal Counsel: Having access to legal counsel for review of contracts, policies, and significant decisions can proactively identify and mitigate risks.

Final Thoughts

Serving on a nonprofit board is a powerful way to make a difference, but it's a role that demands diligence, awareness, and a commitment to protecting both the organization and oneself.

For nonprofit executive directors, fostering a culture where board liability is openly discussed and proactively managed is a sign of strong leadership.

For board members, understanding your legal obligations, insisting on adequate protections like D&O insurance, and maintaining impeccable records are not just "good ideas" – they are essential safeguards.

Don't let the noble mission, or the desire to invest as much as possible in programs, blind you to the very real responsibilities and potential liabilities that come with the privilege of serving. By embracing these principles, you contribute to a stronger, more resilient nonprofit sector, one where both the mission and its messengers are well-protected.