Why Foundations May Need Directors and Officers Liability

Nonprofit foundation boards often discount the need for ‘D&O’ Insurance. They tend to think because they don’t have shareholders their directors won’t be sued. That’s not the case. Foundations serve large and varied constituencies to whom their boards owe specific duties similar to the duties owed by corporate boards.

Potential claimants in suits against nonprofit directors include:

1. Board Members
   A foundation director may sue another board member alleging violation of a duty owed to the nonprofit. Under certain circumstances such an action may be compelled.
2. Employees
   The staff of a foundation may allege a number of wrongful acts, including wrongful termination, discrimination, sexual harassment, and Americans with Disabilities Act violations.
3. Third Parties
   Vendors, funders or even other nonprofit entities that have a relationship with the foundation may allege harm caused by the foundation and/or its directors, officers, volunteers or employees.
4. Beneficiaries
   The people you are in business to help – your recipients – may bring claims against directors alleging wrongful acts such as mismanagement.
5. Donors
   A foundation’s contributors may sue the board alleging misuse of a restricted gift or wasting of assets.
6. State Attorney General
   In most states, the state attorney general represents the interests of the public in assuring the proper management of public benefit corporations and may bring a claim against nonprofit directors alleging wrongdoing.
7. Other Government Officials
   Other government officials, including representatives of the U.S. Internal Revenue Service and the U.S. Department of Labor, may bring actions against nonprofit directors alleging violation of state or federal laws.

Directors & Officers Liability helps protect board members from a number of potential allegations that can be both damaging and costly to the organization. Talk to your insurance broker to learn more about the additional coverages provided by D&O.

Resource: Coverage, Claims & Consequences:  An Insurance Handbook for Nonprofits, Nonprofit Risk Management Center, 2002.