Insurance Coverage for Non-Profits, Their Directors and Officers

Wills, Trusts & Estates Advisory

PUBLISHED ON: October 3, 2008

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The nature and structure of not-for-profit (or "tax-exempt") organizations is as diverse as that of for profit organizations. But not-for-profits are different and they require some different types of insurance. Insurance is a means of eliminating or mitigating costs that are out of the usual course for the not-for-profit. Insurance should permit the directors, officers and employees to "sleep easy" knowing that if some untoward event happens, the event will not disrupt normal operations or place their personal assets at risk. A subsidiary benefit is that insurance may put the handling of the untoward event in the hands of experts or, at least, semi-experts.

Sounds just like for profits? Yes, but the difference is that for profit organizations have owners (shareholders) and radically different drummers to whom they march. Not-for-profits may have members, but no owners per se, other than the general public.

Although not-for-profits do not have shareholders and thus are not subject to shareholder lawsuits, their directors and officers are not immune from liability. Accordingly, they should purchase directors and officers (“D&O”) liability insurance designed specifically for not-for-profits and priced to cover only the risks that directors and officers of not-for-profits actually face. The D&O policy protects directors and officers against claims alleging wrongful acts, i.e., any negligent act, error or omission, or breach of duty committed by the director or officer in the discharge of his or her duties and solely in his or her capacity as a director or officer.

Not-for-profits need employment practices liability (EPTL) insurance. Unhappy and disgruntled employees sue! Not-for-profit employees have a spirit of community, selflessness and idealism. When their idealism wanes or is shattered they may blame the organization — and sue. EPTL insurance places the handling of such problems, which are emotionally laden from everyone’s point of view, in someone outside of the not-for-profit.

Workers compensation insurance is required by law, and some form makes sense for not-for-profits.

Not-for-profits owning property need the insurance coverage normally associated with the particular kind of property, including property and casualty, premises liability and automobile insurance.

Do not be insurance rich and cash poor. As with for profits, the business comes first.
Many for profits use outside insurance consultants to evaluate and recommend insurance programs. In special instances these consultants may be available to not-for-profits.

The final word: Do Good and Avoid Evil.