What are the consequences of leaving an organization unprotected?
As a board member, you can be held personally liable. Your personal assets are potentially at stake if there is no coverage. If you’re going to sit on a board without day-to-day oversight of the company, putting your personal assets out there is a gamble that most people are not willing to accept. Most people asked to sit on a board consult with an attorney about potential ramifications. The first question that attorney will ask is, ‘Does the organization carry directors and officers insurance?’
From the organization’s perspective, the consequences of not carrying this policy can be fatal. The average cost to defend an allegation can be in the tens of thousands of dollars. That’s a cost most nonprofits can’t afford, nor do they have access to a specialized attorney to properly defend themselves. In the end, the organization may have to close its doors.
How can the fiduciary responsibility of board members lead to a claim?
The charters or bylaws of most nonprofit organizations require the board members to protect the assets of the nonprofit, as well as to expand and grow the funding forces. An example might be if an officer or board member decided to use certain funds within an agency on a risky new program, and that risk proves to be a bad investment and the overall agency suffers financially. Then, you could conceivably see a third-party or fellow board member claiming that the future of that organization could be in jeopardy because its endowment or funding has been diminished significantly by the choices of that officer or board member. You could see claims coming from the choices the officers made in connection with the organization’s 403(b) or 401(k) plan. Most nonprofit D&O policies have the ability to address this fiduciary liability now, and many organizations address this exposure with a standalone fiduciary liability policy.
How can you avoid situations that lead to claims?
With D&O policies, the devil is in the details. A comprehensive review of the policy language is essential to understanding what you do and do not have coverage for. Does the policy contain an insured versus insured inclusion? If the policy is providing coverage for employment practices liability as well as fiduciary liability, is the limit of insurance a shared limit, or does each agreement have a separate limit of liability? Is the cost of defense included within the limit of liability? What is the retention amount? Using a broker that specializes in the nonprofit sector can be a great source of information as to the differences between policies and insurance arms.
When completing the application it is important that you fully disclose accurate information, as misstatements can void coverage. The application becomes part of the policy and is a warranty statement. Organizations should also emphasize any loss control and risk management policies used to help minimize any potential losses. By giving more information to an underwriter to help that person become comfortable, you will be able to negotiate better pricing and broader coverage.
Shane Moran is a vice president at ECBM. Reach him at (610) 668-7100 x1237 or [email protected].
