NonProfits-Where and Why Buy D&O

Letter from someone who found me on the internet...

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July 25, 2011

Dear Scott,

I just read your article here:

http://www2.guidestar.org/rxa/news/articles/2004/nonprofit-directors-and-officers-insurance-the-good-the-bad-and-the-ugly.aspx?articleId=839 and wonder if you might answer a few questions for me.

I am a director of a newly formed citizens' group, a non-profit corporation in the state of xx. We are not a 501c(3), although we may become one in the future. We expect to approve our Bylaws at the board meeting tomorrow, and we do have an indemnification clause...

We have been told that, although it is unlikely, there is a small risk that we will be sued, and that to be able to afford to defend ourselves in this unlikely event, we should get directors' and officers' insurance. You wrote in your article:

"Volunteer service is no defense for improper acts. Many states, however, provide immunity from prosecution if the actions arise out of voluntary service in a nonprofit. Remember that these laws are at the state level, and that they vary from state to state. State law cannot provide immunity from federal statues such as ERISA, the Americans with Disabilities Act, or Civil Rights laws."

We are in xx.  How do I find out if we really need this coverage or not? Can you point me to a description of the coverage that would be most applicable in our situation? Further, do you know of insurers who perhaps specialize in our type of needs?

Thanks for your prompt response,

SB

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My reply...

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SB,

Your indemnification clause is only as good as the assets that stand behind it.  Without insurance, you are asking your directors to risk their personal assets.

Any good local commercial insurance agent can help you.  Talk with your board members and supporters - find one who runs a successful business, and ask them to refer you to their insurance agent.

A local attorney can help you with the laws in your state.  Personally, I cannot imagine serving on a board of directors without D&O insurance.  The premiums are usually $1,000 or so for a small group.  Why should so many board members risk so much for so little?

Best of luck.

Regards,

Scott