There are many great reasons to serve as a director or officer (D&O) of a nonprofit organization. Perhaps you have a desire to make a difference, you aspire to strengthen your community, you wish to develop and grow as a leader, or you are called upon because you possess specialized skills and expertise that could benefit the organization. But did you know that you could be putting your personal assets at risk if you do not have the proper insurance to protect yourself? Almost any day-to-day decisions or actions by those associated with a nonprofit organization can trigger a lawsuit. These claims can be costly and disruptive to an organization as well as for board members who can be held personally liable. Ensuring that a nonprofit organization has the appropriate coverage is critical to protect the individuals and assets that support the organization to fulfill its vision.

Many assume that nonprofits are immune from the risk of a lawsuit based on the notion of charitable immunity. In fact, a nonprofit organization is particularly vulnerable and lawsuits against D&O are increasing at an alarming rate. Unlike for-profit corporations, reporting requirements and oversight by regulatory agencies for these organizations are less robust, leaving the door open for potentially inadvertent misconduct. For most, service is part-time and decision-making can be hindered by incomplete information and the inability to carefully review important documents. If your actions as a board member fall below a standard of care, you could be sued and held liable for damages. And while about 95% of claims filed against D&O policies are related to wrongful termination, harassment or discrimination, you should be aware of the other types of suits that you and your organization could face, such as mismanagement of assets or donations, failure to fulfill the organization’s mission, improper conduct by volunteers and claims from government agencies due to violation of laws or statutes – just to name a few! Even if the claims are ultimately proven false, the defense costs can sometimes be devastating.

In California, the average employment practices claim against a nonprofit organization is about 45% higher than the rest of the country.¹ Also, you will find in California that employment laws are more complex and more favorable toward employees, so attorney fees tend to be higher.

So how should you proceed? First, identify the issues that put your particular organization at risk. Consider all of the resources (staff, property, financial capital) as well as the types of activities in which the organization engages. Now, think about what can go wrong and review the insurance policy currently in place.

Even if the claims are ultimately proven false, the defense costs can sometimes be devastating…

Does the coverage accurately reflect these potential challenges? What losses are specifically excluded from coverage? Do volunteers pose a special risk issue? Who is included in the coverage? Are all costs paid by the insurer as they are incurred?

It is important to note that there is no standard D&O policy, so each one must be evaluated on its own merits. And, many nonprofits operate on a shoe-string budget which result in carrying only the minimum amount required by law. Once you have determined coverage provided by the nonprofit organization, you should contact an insurance broker to determine if you need additional coverage. Costs and deductibles vary widely depending on insurer, breadth of coverage provided, prior claims and quality of employment practices.

Your organization should also purchase general liability insurance to cover bodily injury or property damage, as these events are not included in D&O insurance.

So if you are currently sitting on or are considering joining a nonprofit board, understand your fiduciary responsibilities and confirm that your risk exposure is minimized through a tailored D&O insurance policy. With an average cost of $35,000 to defend a claim and the likelihood that one in every ten claims will exceed $100,000 before reaching resolution, you should not wait until something adverse occurs.