What don’t you know about your non-profit D&O insurance policy?

insurance1Just the other day a friend started talking with me about non-profit directors and officers (D&O) insurance. During the course of that conversation, all sorts of things were discussed and at one point I made a mental note to do a little research. Having just finished my homework, I honestly can say that I completely understand why people don’t like insurance companies — this stuff is complicated.

Let me begin by saying to all of my insurance friends out there . . . I love you. I understand the importance insurance. This will not turn into a rant against you or your employers. I promise!

Next let me suggest to all of my non-profit friends — volunteers and professional staff — that you need to be very careful when it comes to D&O insurance. As I’ve just been reminded by Googling around, the devil is in the details.

Here is some of what I learned . . .

Confusing coverage

I didn’t know until a few hours ago that D&O insurance policies are NOT standardized. In other words, what one company covers in their D&O policy may not be covered in another company’s D&O policy.

To make matters even worse, D&O policies don’t really affirmatively list what is covered. In my experience, just saying that the policy covers “wrongful acts” usually results in board members using their imagination. This is where the trouble starts.

Some of the best advise I read online when researching this topic was:

  1. Read the definitions section of the policy
  2. Read the exclusions section of the policy

By understanding “what is what” and “what isn’t what,” you can get a better picture of what your actual coverage looks like.

Typical exclusions

insurance2The list is long, but the following things are typically excluded from the average D&O insurance policy:

  • Bodily injury (General Liability)
  • Property damage (General Liability)
  • Professional services (Malpractice)
  • Handling Funds (Fidelity, Bond)
  • Nuclear radiation, pollution damage
  • Illegal acts
  • Dishonest acts
  • Intentional misconduct
  • Punitive damages
  • Fines, penalties and matters uninsurable by law
  • Failure to obtain adequate insurance
  • Contract claims
  • Employee retirement income security act (ERISA)
  • Antitrust, price-fixing, restraint of trade
  • Peer review, standard setting
  • Credentialing, certification
  • Discrimination
  • Sexual misconduct
  • “Insured versus insured”
  • Injunctions/no pecuniary suits

I found this list in a document published by the Ohio Youth Soccer Association North (OYSAN), which was at one time part of a larger handbook published by the Nonprofits’ Risk Management and Insurance Institute.

If you find yourself saying “Hey, but I need coverage for those things,” then don’t worry because your insurance company is more than willing to sell you other policies to cover those things.  😉

When you assume . . . 

You know how this expression ends, and it is very applicable to what most board members do when it comes to D&O insurance.

A long time ago in a galaxy far, far away . . . a friend of mine was the board president for a non-profit organization that went out-of-business. As the board started down the long, sad path of winding things down, the following facts were discovered:

  • the executive director hadn’t paid payroll taxes in three quarters
  • there wasn’t enough money in the bank to pay the final payroll
  • many vendors hadn’t been paid in full for their products or services

To make a long story short, Uncle Sam always gets his, and you must pay your employees. These things aren’t covered by D&O insurance (in fact, as I recall, the executive director also forgot to pay the D&O insurance premium). In the end, board volunteers were forced to write a number of big checks and those who couldn’t had a lein placed on their house by the IRS.


Best practices?

insurance3I shared some of my research with a group of amazing non-profit consultants tonight. The consensus of this group of very smart people was that board volunteers never ask the hard questions about their D&O insurance policies until it is too late.

This prompted me to ask the obvious question, “What are some best practices that non-profit boards should follow?” Here is what they said:

  • Once a year in a board meeting, time should be set aside to review policies and coverages with an opportunity for Q&A.
  • Boards should pay for a lawyer, who isn’t a board member and who specializes in risk assessment, to review your policies and inform the board about their gaps.
  • Engage an insurance broker who can help you shop policies and tailor the search to your needs.

Yes, insurance can be boring and board volunteers may not want to do this every year, but the angels of our better nature must prevail. Failure to do the right thing when it comes to D&O insurance and other insurance coverage all too often results in tragedy and hardship for the organization and board volunteers.

What is your organization’s process for renewing insurance policies? How do you educate board members about your agency’s gaps and their risk and exposure? Please use the comment box below to share your thoughts and experiences.

Here’s to your health!

Erik Anderson
Founder & President, The Healthy Non-Profit LLC