Do I Really Need Directors and Officers Insurance?
You may hear about Directors and Officers Insurance (D&O) and think only really large non-profits that deal with hundreds of millions of dollars in transactions a year, engage in complex business dealing or are exposed to risk, (like hospitals), require that type of insurance.
According to Nonprofits Insurance Alliance Group which primary covers small to medium sized non-profits, the vast majority of legal actions brought against non-profits are related to employment practices. Since many smaller non-profits don’t tend to have a human resources department, this is an area in which mistakes are easily made.
So what exactly is D&O Insurance? According to the Nonprofits Insurance Alliance Group piece on Non-Profit Quarterly:
D&O insurance covers the organization and its directors, officers, and trustees against actual or alleged wrongful acts in three major areas:
-Governance liability: claims resulting from general governance decisions;
-Fiduciary liability: claims resulting from alleged fraud and improper financial oversight, including oversight of employee benefit plans (Employment Retirement Income Security Act [ERISA]) and use of grant funds and donor contributions; and
-Employment practices liability: claims resulting from employment-related activities.
Does Your Non-Profit Have Employees?
They note that employees are increasingly willing to sue non-profits. In the last 10 year, 94% of the claims costs the Group has handled have been for employment practices. While their data shows the average claim cost for employment practices was $33,000, if you only count the claims with merit that proceed past a complaint to the EEOC, the costs skyrocket to $150,000-$200,000.
Employment practices claims are most typically about harassment, discrimination, accommodations (i.e. Americans with Disabilities Act), defamation and improper job classification. Improperly classifying someone as exempt, non-exempt or independent contractor is one of the biggest issues for non-profits since the ability to avoid paying overtime and benefits seems like a good way to keep overhead costs down.
The Fair Labor Standards Act sets out strict criteria about who qualifies for which category. There are some good websites to help you understand the act in more common terms, one of the most important things to be aware of is that a person can’t volunteer to be assigned to a specific category. The work they do and the manner in which they do it are the determining factors.
No Extra Pay For Imaginations Running Over Time
This section is most applicable to arts non-profits:
Some employees may also perform “creative professional” job duties which are exempt. This classification applies to jobs such as actors, musicians, composers, writers, cartoonists, and some journalists. It is meant to cover employees in these kinds of jobs whose work requires invention, imagination, originality or talent; who contribute a unique interpretation or analysis.
Identifying most professionally exempt employees is usually pretty straightforward and uncontroversial, but this is not always the case. Whether a journalist is professionally exempt, for example, or a commercial artist, will likely require careful analysis of just what the employee actually does.
Not All Policies Created Equal
It might be worthwhile to bookmark or print the Nonprofits Insurance Alliance Group piece as a resource when looking for D&O insurance. They offer some important advice and caveats when purchasing the insurance:
For example, some D&O policies will offer defense for breach of contract and allegations of misclassifying employees, but no D&O policy will actually pay damages related to a non-employment-related breach of contract, or misclassification of employees, or failure to pay payroll taxes. Most D&O policies do not offer coverage for these actions at all. These are nuances that a good broker will be able to explain to a nonprofit client.
Also, just because there is a list of coverages summarized on the declarations page of an insurance policy does not mean one should assume that all of these coverages are included in the D&O policy that is attached. It is not uncommon for insurance companies to list many types of coverage on the front page of the policy but actually only provide the coverage if a specific box is checked and the premium has been paid.
Don’t Go To Trial With The One That Brought You
If a case goes to court, they strongly advise using an impartial lawyer rather than the lawyer providing advice on the matter, “An attorney who has been working with the nonprofit providing advice on a difficult situation and who is then hired to defend that claim can end up in the position of defending his or her own advice.”
They also caution that even when your employment practices have been well-considered and executed with deliberate care, anyone serving on a jury is likely to have at least one memory of an unfair supervisor which will cause them to empathize with the plaintiff. Moreover, they warn your charitable status may be of no value. “Depending on the judge, the defense may even be prohibited from telling the jury that the defendant organization is a nonprofit one.”