Managing or being part of the board of directors of a non-profit organization (NPO) continues to be a noble and necessary activity. NPOs are often involved in protecting the vulnerable; provide services to those in need; and fill educational gaps for those subject to being deceived by charlatans and thieves, to name just a few activities. However, despite these noble and necessary efforts, NPO Directors and Officers (D&Os) face liability risks and need to be clear about what these risks are and what adequate protection consists of. In this litigious partnership, NPOs that are sued experience an average of $235,000 in legal fees, even if the lawsuit is unfounded.

Specifically, Directors and Officers (D&O) are exposed to employment claims such as wrongful termination, breach of employment contract, discriminatory hiring practices, lack of employment or promotion, retaliation, negligent evaluation, sexual harassment, unfair discipline, invasion of privacy, deprivation of career opportunity, employment-related defamation, improper infliction of emotional distress, and mismanagement of employee benefit plans. Labor claims represent the area where more than 80% of claims arise.

Therefore, even before the first employee is hired, an Employee Handbook should be developed based on models currently used in similar service organizations and modified later if necessary. The employee must receive one and must sign a statement that she has received it. A Workers’ Compensation policy that covers injuries, illnesses, and deaths that result from workers performing their jobs or being on the job is also essential.

The other types of claims that arise are non-employment claims including misallocation of funds, breach of fiduciary responsibilities, self-dealing/conflict of interest, antitrust or trade restriction violations, defamation, invasion of privacy, negligent financial advice to others. parties, failure to maintain insurance, interference with contract, breach of contract, lack of licensure or certification, and trademark, patent, or copyright infringement.

Demands can come from sectors as diverse as beneficiaries who feel they are entitled to more than they received; board members who disagree with a majority decision on the use of funds; donors who feel that their contributions have not been used to further the expressed objectives of the organization; state attorneys general who bring legal proceedings against the board for issues such as mismanagement of funds and antitrust violations, and other government officials such as the IRS and the Department of Labor who allege violations of federal or state law.

It is important for NPOs to make the distinction between what is covered by a D&O liability policy and what is covered by a general liability (GL) policy. A GL policy does not cover what a D&O liability policy is designed to cover. A GL policy is comprehensive coverage and is designed to cover bodily injury, property damage, theft, criminal acts, willful fraudulent acts, contamination, nuclear reactor or radiation, and litigation pending before the original policy start date. To reduce this, a GL policy essentially covers bodily injury and property damage, while the D&O policy covers wrongful acts including “bad management decisions” and never includes bodily injury and property damage. Therefore, it is essential that an NPO have both policies.

In summary, the D&O liability policy should not only cover claims against the organization, but also all prior acts and defense expenses. Also, not only D&Os should be covered, but also employees, volunteers, and committee members. The best D&O liability policy does all of this.

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