- Legal costs in defending proceedings brought against them alleging wrongful acts.
- Any damages awarded to the claimants against the Directors and Officers, including out of court settlements.
Although Directors’ and Officers’ liability insurance (D&O) often is associated with large for-profit companies, they are not the only ones that need it. Many people hold the common misperception that directors (including trustees) and officers of a nonprofit organisation do not have a meaningful exposure to personal liability. The reality of today’s tenuous legal environment is quite the opposite.
Function of nonprofit directors
The primary role of non-profit directors and officers is to maintain financial stability and provide the necessary resources and environment to accomplish the goals and purposes of the organization. The unique nature of nonprofit organizations presents directors and officers with difficult challenges in performing this role.
Need for D&O insurance:
Non-profit directors and officers may have an even more demanding job than their for-profit counterparts, because of the following:
- Affairs of the organisation may be less familiar to the individual and may be conducted under less efficient conditions than in business corporations.
- The applicable legal standards of conduct for nonprofit directors and officers are at least as high, and perhaps higher, than the standards applicable to their for-profit counterparts.
- Damages recoverable from directors and officers of even a relatively small nonprofit organization can easily exceed the net worth of many individuals.
- Many for-profit corporations are subject to external forces, which tend to monitor corporate performance and dictate standards of behaviour. Reporting requirements and oversight by regulatory agencies also serve to identify and guide for-profit corporate performance and behaviour. These external forces are largely absent for nonprofit organizations. Accordingly, nonprofit directors and officers must implement their own internal information system and performance criteria in order to timely and effectively evaluate the progress of the organisation and the abilities of its management.
- Because nonprofit directors and officers are frequently subjected to less external scrutiny than their for-profit counterparts, a greater tendency may exist to become complacent, reactive and perhaps careless in the fulfilment of their fiduciary role.
- In addition, the resources of many nonprofit organizations are insufficient to provide directors and officers with the most desirable support. As a result, decision-making may be hindered by incomplete information, insufficient time and inability to carefully investigate and document relevant factors.
In today’s litigious society, nonprofit organizations and their board members commonly face lawsuits for an extended list of alleged wrongdoings: Discrimination (age, race, sex, employment, membership), Harassment, Wrongful termination of employees, Inefficient administration or supervision, Waste of assets, Misleading reports or other misrepresentations, Libel and slander, Failure to deliver services, Acts beyond the granted authority.
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