Directors and officers (D&O) insurance

Most people who join a small charity's board are volunteers. Sooner or later one of them asks: "If someone sues the charity, could they come after me?" This guide explains what directors and officers insurance, usually called D&O, does and doesn't cover, who needs it, and how it fits with the legal protection volunteers already have. Our insurance basics guide covers the other policies a charity may need, and what a charity board does explains the duties board members are judged against.

What D&O insurance is

The Nebraska Department of Insurance explains that when someone makes a claim against an organization, its directors and officers are "typically named in the lawsuit" too. D&O policies are designed to protect people against personal losses when they're sued over their actual or alleged wrongful acts in managing the organization. The Department says D&O policies typically cover legal fees and sometimes settlement costs.

The Department lists the kinds of claims D&O can respond to, such as misrepresentation and improper use of funds. It also lists three typical parts of coverage you may see in a policy:

• Cover for the individuals when the organization can't pay for their losses, usually legal defense costs and settlements.
• Reimbursement for the organization when it pays those costs for its directors and officers (for example, under an indemnification clause in your bylaws).
• "Entity coverage," which protects the organization itself when it and its officers are both named in a lawsuit.

Not every policy has all three. Ask which ones yours includes.

What it usually doesn't cover

The Nebraska Department of Insurance says D&O policies don't cover illegal activities like fraud, and don't cover personal profiting, bodily injury or property damage. Bodily injury and property damage are what general liability insurance is for, so D&O is not a substitute for it.

D&O also won't pay back money that was actually taken. The Department puts it plainly: the policy won't cover actual losses from the acts it lists, such as actual stealing. Theft is a matter for your financial controls and, if it happens, our guide on when money goes missing.

Every policy is worded differently. When you read one, look for:

• Who counts as an insured. Directors and officers, certainly. Does it also cover employees, committee members and other volunteers?
• What counts as a claim, and whether a demand letter or a government investigation counts, or only a lawsuit.
• Whether defense costs reduce the limit, or are paid on top of it. If they come out of the limit, less is left for a settlement.
• Employment-related claims, such as claims about firing, discrimination or harassment. Check whether they're covered, or need specific wording or a separate policy.
• When the claim must be reported, and what happens to claims about decisions made before the policy started.

Who needs it

Any charity with a board can be sued, and the people on the board can be named personally, even when the claim has no merit. The Oregon Department of Justice's guide for board members points out that there is some degree of risk, "including the cost of defending a frivolous claim," and says directors should discuss with the organization's attorney whether to buy D&O insurance, add indemnification provisions to the governing documents, or both.

D&O is especially worth discussing if your charity:

• has employees,
• manages significant money, property or grants,
• works with children or people at risk,
• makes decisions that affect other people's money or jobs, such as awarding grants or ending contracts, or
• is recruiting board members. Good candidates often ask about D&O before they join.

A charity run entirely by volunteers with a small budget may decide the cost isn't worth it yet. That's a board decision. Write it down in the minutes, and review it each year.

Indemnification: your bylaws and D&O work together

Indemnification means the charity agrees to pay certain costs a director or officer faces because of their role, such as legal fees. It's usually written into the bylaws. Our bylaws template has a section on it.

An indemnification promise is only as good as the charity's bank balance. If the charity has little money, or the claim is against the charity too, the promise may be worth very little. That's one reason D&O policies include reimbursement cover for the organization. State nonprofit laws may set rules on what an indemnification clause can promise, so have a lawyer review the wording.

How D&O fits with volunteer immunity

The federal Volunteer Protection Act

The Volunteer Protection Act of 1997 (42 U.S.C. 14501 to 14505) gives volunteers some protection from personal liability. It defines a volunteer as someone who isn't paid, other than reasonable expense reimbursement, and doesn't receive any other thing of value in place of pay worth more than $500 a year. It says that includes "a volunteer serving as a director, officer, trustee, or direct service volunteer."

Under the Act, a volunteer isn't liable for harm caused on the charity's behalf if:

• they were acting within the scope of their volunteer responsibilities,
• they were properly licensed, certified or authorized, where that was needed,
• the harm wasn't caused by "willful or criminal misconduct, gross negligence, reckless misconduct, or a conscious, flagrant indifference" to the rights or safety of the person harmed, and
• the harm wasn't caused by operating a vehicle, vessel or aircraft for which the state requires a license or insurance.

The Act also limits punitive damages against volunteers, and limits each volunteer's share of noneconomic damages (such as pain and suffering) to their own percentage of responsibility.

What the Act doesn't do

• It doesn't protect the charity. The Act says nothing in that section affects the liability of the nonprofit organization itself.
• It doesn't stop the charity suing its own volunteer. It doesn't affect civil actions brought by the nonprofit against its own volunteer.
• It doesn't apply to some misconduct at all, including crimes of violence, hate crimes and sexual offenses where the person has been convicted, violations of civil rights laws, and acting under the influence of alcohol or drugs.
• It doesn't cover board members who are paid more than the Act's limit.
• It isn't insurance. It's a legal defense to liability. It doesn't pay a lawyer to argue it, and it doesn't cover claims that fall outside it.

State law varies

The Act preempts state laws that are inconsistent with it, but it doesn't override state laws that give volunteers more protection. A state can also pass a law opting out of the Act for state court cases where all parties are citizens of that state.

The Act also lets states attach conditions to their own volunteer protection without conflicting with it. For example, a state may require the charity to follow risk management procedures, such as training volunteers, or may make protection apply only if the charity provides "a financially secure source of recovery," which can be an insurance policy. In a state with that kind of rule, whether your volunteers are protected may depend on whether you carry insurance.

States' own laws differ. Oregon's attorney general, for example, tells board members that the law gives volunteer board members qualified immunity from claims of negligence, but that they may still be sued over losses alleged to come from gross negligence or from willful or fraudulent acts. The same guide notes that the IRS may hold directors personally liable if the organization violates federal tax law, most likely by failing to handle mandatory payroll withholding.

Ask a lawyer in your state what protection your volunteer board members have, and whether any of it depends on insurance.

Shopping for D&O

• Get quotes from more than one licensed agent or broker. Our insurance basics guide has tips on working with one.
• Ask whether D&O can be bundled with your general liability policy, and whether employment practices cover is included or separate.
• Be ready to share your budget, number of staff and volunteers, what programs you run, and any past claims.
• Put the renewal date in your annual compliance checklist, and report any possible claim to the insurer as soon as you hear of it.
• Tell new board members what cover you have. A short line in your board orientation is enough.

D&O checklist

• Our board has discussed D&O insurance and recorded its decision
• We know who counts as an insured under our policy, and whether employment claims are covered
• We know whether defense costs reduce our policy limit
• Our bylaws have an indemnification section a lawyer has reviewed
• We know what volunteer protection our state gives board members, and whether it depends on insurance
• We keep general liability insurance, because D&O doesn't cover bodily injury or property damage
• New board members are told what cover we have