D&O insurance refers to directors and officers liability insurance and it is meant to mitigate the personal responsibility of certain parties affiliated with an organization in the event of litigation. Many for-profit entities engage this type of insurance coverage, but fewer non-profits carry it. Though non-profit board members may assume their organization’s charitable mission and laudable work shield them from these sorts of expenses, litigation is always possible and almost always unforeseen. Navigating D&O insurance with local nonprofit audit services can help in these circumstances.
Like with other forms of insurance there are multiple coverage options, from who and what is covered to certain policy limitations. D&O insurance can cover your non-profit as a whole and several of the people operating within it, such as directors, officers, employees and committee members. Some policies may also provide the option to cover volunteers. This type of insurance covers litigation related to wrongful acts, errors, misleading statements, neglect or breaches of duty connected with a person’s performance of duties. The width and breadth of how these terms are defined and covered depends on the policy, but can include allegations of harassment and discrimination, mismanagement of funds, or failure to provide services.
With most D&O insurance policies, the insured non-profit only pays for claims that are filed during the policy period. This means if the allegation that is filed pertains to events that occurred outside the policy period, but the claim is filed during the policy period, the non-profit is only responsible for any payments related to the insurance claim, such as applicable deductibles. However, if a claim is filed after the policy period ended, even if the litigated actions happened while the policy was active, it is no longer covered. Some insurance providers offer extended reporting period (ERP) coverage which can help with the latter circumstance. With most policies, when your non-profit files an eligible claim, they are entitled to coverage for court judgements and reimbursement for reasonable defense costs.
Choosing the right policy
One of the key functions of any non-profit board is to effectively and strategically manage funds and thereby ensure the longevity of the organization and its work. Obtaining the appropriate D&O insurance policy can be an important part of that financial strategy. When choosing your policy, be mindful of redundant coverage, such as bodily injury or property damage that is covered by other forms of insurance the non-profit retains. Additionally, in some states, such as the California Nonprofit audit requirements, volunteer immunity statutes provide limited protection for negligence. And as with other forms of insurance, it is important to consider whether a high premium/low deductible policy or a low premium/high deductible policy is more appropriate for your nonprofit’s financial reality and goals. If you’re unsure, contact us.
Ernst Wintter & Associates LLP specialize in California nonprofit audits and tax preparation. Contact us today for help with your nonprofit audit or tax prep needs.