This month’s article concerns the nonprofit community, an area of business that we know many of you are already involved with or actively considering. Nationally, nonprofits contribute in excess of $2 trillion to the U.S. Economy and, in Southern California; the Santa Barbara and Ventura communities have among the highest number of nonprofits per capita.

One of the main difficulties in running a successful nonprofit is attracting board members. There are a number of risks involved in running a nonprofit and it is of vital importance to protect those involved.

Director and Officer Insurance is a key ingredient in protecting nonprofit organizations. Below is some useful information to consider.

Protecting Nonprofits, Directors and Officers (D&O) Liability Insurance:

D&O coverage protects against a breach of duty by the directors or officers of an organization. Policy guidelines can differ between insurance companies, but the general idea is to protect the individuals and organization from suits resulting from "any actual or alleged act or omission, error, misstatement, misleading statement, neglect or breach of duty by an Insured Person in the discharge of his/her duties”.

Covering where others fall short:

Indemnity provisions and state “safe harbor” laws for nonprofits do not provide proper coverage for D&O exposure. While indemnity provisions can protect an individual in certain situations it is possible and quite common for lawsuits to be filed outside of the narrow limitations that most indemnity provisions fall into. In addition, most indemnity provisions compensate the individual for their loss, covering the cost only after the individual has paid it. Properly written D&O insurance covers the costs up front. “Safe harbor” statutes tend to differ from state to state and typically have limitations so narrow that most suits fall outside of their coverage.

Nonprofit exposure and current concerns:

With the exception of nonprofits in the medical field, there is a low level of exposure for most nonprofits for liability suits. It should be noted though that in recent years there has been an increase in the frequency of employment related suits brought against nonprofits. An estimate 90% of suits brought against nonprofits are employment related. While actions are being taken to reduce such suits, the liability is still there and it is important to be aware of the risks.

Claims-made coverage and the Extended Reporting Period (ERP)

D&O policies differ from most liability coverage in that they will pay for any claim made during the policy period, even if the event occurred prior to the policy period, this is called “claims-made coverage”. The downside to this is that D&O policies do not cover once the policy is canceled, even if the incident occurred during the coverage period. For example, Coverage is bought in 2002 and canceled in 2006. Then in 2007 a claim is made concerning events from 2005. Under the claims-made coverage, there is no coverage from the canceled D&O policy. Still, companies understand that it is desirable to have coverage for claims occurring after a policy period, so it is possible to purchase an ERP to deal with “Tail Issues”. When purchasing a policy there are a number of variables to consider:

• Can ERP be bought at your option?
• How long is the ERP? 6 months? One year? Two years?
• Cost of ERP and the window in time which it is possible to purchase ERP
• Is the cost of defense within limit of insurance?

While there is some standardization in policy language, there are also critical differences among D&O insurance policies. When deciding on the best coverage you must take into consideration the organizations operating characteristics. We recommend a thorough review of coverage. With proper D&O coverage, individuals serving on the board can act with the full knowledge that they are protected. In the long run this will help you organization attract and retain a stronger board.