Many smaller or start-up nonprofit organizations struggle to find money in their budget for even the most basic nonprofit insurance coverage. Over and above the ethical consideration that you protect the community and your clients from damages due to the organization's negligent actions, there is an inherent risk to the personal assets of the nonprofit organization's individual directors and board officers has to considered when making decisions about acquiring appropriate insurance coverage. Most Nonprofit By-Laws require that the Nonprofit Organization indemnify all board officers and directors. This would require that the organization cover the cost of defending any uninsured claim against the organization or any director or officer. Once the organization's assets are depleted, then the individual board members may be held responsible for any uninsured damages or defense costs.
What about my Homeowners Insurance?
Some homeowner's policies do provide coverage for bodily injury or property damage caused by you as a volunteer of the organization. It may also be possible (at a significant cost) to add Directors and Officers coverage to your homeowners' policy. The Directors and Officers coverage extension may provide some personal protection, but that protection would be limited to you personally. Additionally, as we will see later, the coverage only goes so far.
What about the Volunteer Protection Acts?
On its face, the Federal Volunteer Protection Act, USC 14501 may seem to provide a high degree of protection against lawsuits for your participation on a Nonprofit Board. Unfortunately, as with similar state laws, the Volunteer Protection Act is full of exceptions. One exception that stands out is that there is no protection for any action that is related to claims associated with the use of automobiles. Additionally, State and Federal Volunteer Protection laws may require nonprofit organizations to have applicable insurance in place, such as General Liability and Volunteer Accident. Failure to maintain an adequate insurance program may abrogate the provisions of these laws. https://www.govinfo.gov/content/pkg/PLAW-105publ19/pdf/PLAW-105publ19.pdf
But, My Organization has Directors and Officers Coverage...
Many board members believe that the Organization's Directors and Officer policy is the backstop for any claims against the board or individual board members. Directors and Officers policies exclude coverage for bodily injury and property damage and offer no relief for these types of claims against the organization or individual board members. More importantly, it is the Failure to Maintain Insurance Exclusion that is found in many nonprofit Directors and Officers policies. Simply put, this exclusion means that if the board or anyone acting on behalf of the board makes a decision not to purchase coverage for any reason, and an uncovered claim results, there is no protection for that decision under the Directors and Officers policy.
The defense costs and ultimate judgment would be paid by the organization until funds were exhausted. At that point, individual board members become susceptible to claims against their personal assets. Because the board failed to fulfill their professional duties and obtain the appropriate insurance coverage, the board members are left to fend for themselves. There would be no protection under the Directors and Officer's policy, and it is unlikely that there would be any relief from the Volunteer Protection Laws. Even the best-case scenario would leave board members with the obligation to pay for their own defense. Board members could likely face additional lawsuits from the community at large for their failure to protect the community, the nonprofit, and its mission. It is important to note that the board is responsible for putting insurance in place for your organization and ensuring that the nonprofit organization's insurance program includes all the necessary coverage elements and the correct limits.
What do we do?
It's simple. Don't rely on guidance from a generalist insurance broker. Rely on an expert who understands the insurance issues and obstacles you face. Work with a nonprofit insurance professional.