Tag Archives: volunteers

D&O Coverage: A Low-Cost Alternative for Nonprofits

Who needs nonprofit directors and officers (D&O) coverage when you have volunteer immunity and homeowners insurance? Not so fast. It is possible to find some coverage, or form of immunity, under your homeowner’s policy, and there are attorneys that find ways to wedge things into coverage when there are no other remedies available.  However, that doesn’t mean you should ignore the availability of the proper insurance. Rather than hope to fit a round peg into a square hole, buyers should look to purchase coverage for any exposure that keeps them up at night.

There are people who wrongly believe that if they are performing charity work they can’t be sued, won’t be sued, or have some form of mythical immunity or free insurance somewhere to protect them. Let’s explore those theories in more detail.

Isn't there a federal law that grants immunity?
In 1997, our government passed the federal Volunteer Protection Act (VPA) to promote volunteerism for nonprofit organizations. There is more to the act than can be summarized in this article, and any legal advice should come from an attorney, but it’s important to know that there is a federal law designed to provide protection to volunteers. Also, note that the immunity applies to volunteers, and not necessarily the nonprofit organization or compensated employees/executives. With that knowledge, it’s important to be aware of other limitations of the act.

Exceptions from the federal law include:

  • Acts of violence
  • Acts of international terrorism
  • Hate crimes
  • Sexual offenses
  • Civil rights violations
  • Claims involving use of alcohol or drugs

In the absence of a definition of “Civil Rights” in the act, all sorts of common problems could be exempt. Three instances that immediately come to mind are discrimination, sexual harassment and privacy rights. Those are common allegations in claims we see made against volunteers, nonprofit organizations and their leaders.

Volunteers may also lose their potential immunity in these situations if:

  • the volunteer is acting outside the scope of his or her responsibilities to the organization
  • the volunteer was unlicensed if required or appropriate
  • the harm was caused by gross negligence rather than ordinary or simple negligence
  • the harm was a result of operating a vehicle, vessel or aircraft that requires a license or insurance
  • the volunteer receives compensation or anything other than compensation that is worth over $500
  • the charity loses its nonprofit status

The VPA has provisions indicating that immunity provided by the act cannot be reduced by state laws, but can be broadened by state law. The federal law will apply to volunteers unless a state opts out of the law, which is permitted.  New Hampshire, for example, opted out in instances where everyone involved is a state resident and a New Hampshire state court is used.

Can we find immunity provided by state laws?
Many states do have immunity laws available to volunteers providing services to nonprofits. Every state has its own advantages and limitations. Again, seeking the advice of an attorney licensed in the relevant state is appropriate. When seeking the advice of counsel as to the immunity provided by state law, there are some questions to ask:

  • Does the state law only protect volunteers, D&O or both?
  • Will the state law prevail if the plaintiffs are from a different state?
  • What material limitations exist?
  • How is immunity impacted by willful or negligent activities?
  • Is the nonprofit organization immune from vicarious liability arising from the conduct of the volunteers?
  • Can an organization subrogate against a volunteer for costs associated with vicarious liability?

Will a personal homeowner's insurance or personal umbrella policy protect me?
The easy answer is that an insured might find some coverage, but not for all situations. Not all homeowners policies are the same and some may have special D&O enhancements. If you review what is generally covered, you will see coverage for bodily injury and property damage on those policies. It is also important to keep in mind that these are personal policies and any coverage provided would not be shared with the nonprofit organization or any other person affiliated with the organization. So if a homeowners policy or personal umbrella is designed to only cover bodily injury or property damage and is limited to protecting only one individual, is this the best solution for a nonprofit organization and all its leaders, employees and volunteers? That’s easy – no.

How about buying the proper insurance?
There is a policy specifically designed to protect the directors, officers, employees, trustees, volunteers, committee members, interns, domestic partners and the organizational entity.  Note that the coverage isn’t limited to just the directors and officers. Those other individuals are also protected by this insurance.  A typical D&O policy pays on behalf of the nonprofit organization when that organization is obligated to indemnify the individuals for their actions on behalf of the organization, as outlined in the organization’s bylaws.  The organization itself is also generally covered for alleged wrongful acts. D&O policies are broadly written to cover claims alleging any error, act or omission arising from activities on behalf of a nonprofit organization. The policy won’t cover bodily injury, property damage, pollution, workers’ compensation or issues arising from the administration of benefit plans. Those items should be covered on other policies specifically designed for those exposures.  You should also find coverage for the individuals and entity for things like discrimination, harassment, wrongful termination and other personal injury violations such as invasion of privacy, wrongful imprisonment and, in some cases, copyright violations.

Similar to personal lines policies, no two D&O policies are the same. Each one needs to be closely reviewed to identify limitations as well as unique coverage enhancements. Some limitations to avoid are antitrust exclusions, third party discrimination exclusions, or overly broad insured versus insured exclusions. There are enhancements to negotiate such as coverage for immigration claims, wage and hour claims, lifetime personal extended reporting provisions, publishers liability, public relations expense coverage, priority of payments, punitive damages coverage, where insurable, and more.

Considering the relatively low cost for a properly constructed D&O policy for a nonprofit organization, it makes a lot more sense to buy the coverage than try to hide behind limited immunity or wedge coverage into the wrong insurance policy.

Fiduciary Liability Insurance in the Nonprofit Sector – What You Need to Know

As a national insurer of nonprofits we are often asked what do their directors and officers need to know about their fiduciary responsibilities and can they insure for their errors or omissions. Just do an Internet search on “fiduciary duties of nonprofit directors and officers” and be treated to 150,000 articles describing the responsibilities, but only a few that drill down very deeply on the insurance issues.

You’ll frequently see references to the duties of care, loyalty and obedience, how the “business judgment” rule can work both for and against directors and officers, and how indemnification is achieved. So once you’re up to speed on all that, let’s look at how the insurance mechanism fits in.

What It Is, What It Isn’t
Fiduciary liability insurance (FLI) is not fidelity bonding that would respond to claims of embezzlement or other criminal activity. For that you need a fidelity bond or employee and volunteer dishonesty coverage.

FLI can cover ERISA liabilities, although ERISA coverage is more commonly found in the bond market.

For the most part, FLI protects the organization, its directors, officers, and employees. It is common in the nonprofit sector for coverage to extend to volunteers and in some cases even to interns and students-in-training. The coverage will attach if a claim is made that the organization or an insured person breached its duty as a fiduciary. Some carriers use the Side A (insured person), Side B (each claim) approach, while others combine all insureds into one form.

There are also a variety of exclusions related to claims by one insured against another. For example, some forms exclude claims brought by or on behalf of the “Organization” (usually a defined term). Others exclude claims by or on behalf of an individual “insured person” (also defined).

In underwriting fiduciary liability coverage in the nonprofit sector, carriers require certain controls be in place including, but not limited to:

  • Articles of Incorporation filed with the respective state
  • Bylaws have been accepted by the Board of Directors
  • Board meetings are held at regular intervals and minutes are on file
  • 501(c)(3) status has been granted by the IRS
  • State tax exemption status has been granted
  • Filing has been completed, where required, with the Registry of Charitable Trusts or similar state entity
  • Payroll and other taxes are timely paid
  • Workers’ compensation is in place for employees
  • Reports to regulatory and funding agencies are submitted timely
  • Regular review of financial and business dealings to protect the organization’s tax exempt status
  • Full disclosure of any self-dealing transactions
  • Annual review and approval of budget
  • Review periodic financial reports at least quarterly
  • Annual review of executive compensation
  • Ensure that appropriate internal controls are in place

Some of the more common exclusions include:

  • Breach of contract (typically found in CGL forms or endorsements)
  • Fines, penalties and sanctions
  • Punitive damages (unless insurable in the respective jurisdiction)
  • Personal profit or advantage
  • Fraud or dishonesty
  • Costs of complying with equitable relief, including but not limited to, injunctions, restraining orders or restitution

It is this last exclusion that can be the most troublesome. While fiduciary claims are rare in the nonprofit sector (see below), the most common involve audits or investigations by grantors and funding agencies that conclude funds were improperly used or distributed. If the claim is for restitution, the agency will need to manage that with its own funds.

And From The Claims Files
Data from over 23 years of directors and officers claims files at the Nonprofits Insurance Alliance Group indicates the very low frequency of fiduciary liability claims.

Of the 1,633 claims reported during that time, 85% involved employment liability claims, including ADA discrimination. That’s a whole other article.

Another 7% were breach of contract claims, for which we provide defense costs only coverage.

Wage and hour claims totaled 5%, for which we also provide defense costs only coverage.

A mere 3% (52 claims over 23 years) were for fiduciary liability. Interestingly, many of those involved investigations by state attorneys general. None of those involved any loss payments and only one involved defense costs over $5,000. Only one claim required a loss payment to a client who had improperly been denied services.

So In Conclusion
In order to attract responsible board members, nonprofit agencies need to have directors and officers liability coverage in place that includes fiduciary liability. We recommend that such coverage also include:

  • Defense costs payable as they are incurred (rather than through a reimbursement mechanism)
  • Defense costs in addition to the liability limits
  • Broad definition of who is an insured
  • Broad employment practices liability coverage
  • No deductible (other than for large nonprofits)
  • Broad definition of what constitutes a “claim”
  • Event trigger or occurrence basis rather than claims made

With that said and in place, the good news based on our data is that fiduciary liability claims are very infrequent in the nonprofit sector and generally cost little to defend.