November 9th, 2020
Nonprofits provide critical services to both our local communities and the nation, but providing these services doesn't come without risk.
As a director or officer of a nonprofit, you could be held personally liable for financial damages caused by you, as a board member. Depending on the operation and size of the nonprofit, this could be the most significant financial risk you encounter.
Nonprofit leaders are sometimes even held to the same standards as corporate executives and board members. No matter your qualifications or the duties you sign up for, your personal assets could be exposed to the liability of your organization.
Wondering what a Directors & Officers insurance policy covers? Make sure to check out our guide to D&O insurance.
Here are some nonprofit directors and officers insurance claim examples that board members could be held personally liable for:
Failing to maintain adequate financial records - Failure to maintain adequate financial records could lead to numerous lawsuits against the leaders of a nonprofit. Incomplete, outdated, or inaccurate records could make it difficult to prove you're using donations properly. They also inadvertently provide more opportunities for employee theft and embezzlement (and make it challenging to disprove if innocent). A failure to maintain adequate financial records could even get the organization you lead in trouble with the IRS.
Exhibiting discrimination in membership standards - If your nonprofit is a membership-based operation, your business could be at risk for any discrepancy in membership standards. Any oversight or leniency you give a particular person could be seen as discrimination by those who did not receive the same treatment and standards.
Exceeding the authority granted by your organization’s charter or bylaws - Each nonprofit executive should abide by the powers given to them within the organization's bylaws or charter. These documents outline the authority each role has and give a road map of how significant decisions should be made. If a nonprofit board member oversteps the decision-making rules of the bylaws, that executive could be the subject of a lawsuit.
Using budgeted or donated money in a manner different from originally intended - Sometimes, donors request that their contribution goes to a specific area of the nonprofit. For example, someone donating to a church might want their funds to be applied specifically to the youth group activities. If that money is used for any other purpose, for any reason, the organization could be responsible for paying back that donation and for the reputation damage to the nonprofit, since donation numbers will most likely drop until trust is restored.
Failing to preserve tax exempt status - There are certain requirements the IRS places on nonprofit organizations to preserve their tax exempt status. For example, attempting to influence or promote a legislative agenda could result in the removal of an organization's tax exempt status. The board members responsible for violating IRS guidelines could be the subject of a lawsuit from donors who were relying on that tax exempt status.
In addition to protecting your leaders' and board members' personal finances, director and officers insurance for nonprofits can provide other benefits to your organization.
One primary reason why D&O insurance is so valuable is that it pays the attorney costs to defend your nonprofit leaders, even if the allegations are baseless.
Due to the complicated and complex nature of director and officer risks, these claims could drag out for years while the situation is investigated. Defense costs alone could financially ruin a nonprofit and possibly its board.
Qualified board members will often require that D&O insurance for nonprofts be in place to protect them against an allegation or lawsuit. In most instances, the more qualified the member (or more significant their assets), the higher limits they require.
Having D&O insurance also shows these discerning board members that you view protecting their assets as a priority in the organization.
You shouldn't have to shoulder unnecessary burdens to serve your community. By purchasing D&O insurance and transferring the risk to an insurance carrier, you can spend your time focusing on growth and helping the community, instead of worrying about legal ramifications.
Whether your nonprofit is large or small, D&O insurance for nonprofits plays a critical part in protecting you and your board members from liability arising out of the organization. It will also help you attract and retain more qualified board members to help you lead the organization moving forward.
There are virtually an unlimited number of nonprofit D&O claim scenarios that could happen, but your personal assets do not have to be exposed because you want to help a nonprofit. Doing good in your community doesn't have to come with such a significant financial burden.
A nonprofit D&O insurance policy can remove the risks of these issues and transfer them onto an insurance carrier. This will keep you and your family protected from the organization's liabilities and allow you to continue to serve your community.
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