Do Nonprofits Need D&O Insurance? What Boards Should Know

Most nonprofit board members find out about directors and officers (D&O) insurance in one of two ways. Someone mentions it during orientation, or someone is named in a complaint and asks whether the organization has it. The first is much better.

The short answer to "do we need it" is that almost no law requires it, and almost every board should carry it anyway. This guide explains why, what a policy does and doesn't pay for, how to think about how much coverage to buy, and what to ask your broker.

This is general information, not legal or insurance advice. Policies differ a great deal, so the real answers are in your own policy and from a licensed broker or attorney.

What D&O insurance is

D&O insurance pays when someone claims that the organization's leaders did something wrong in how they governed. It typically covers the legal cost of defending the claim, and then any settlement or judgment, up to a limit you choose, after you pay a deductible (often called the retention).

The kinds of claims it responds to include allegations of:

• Mismanaging the organization or its money
• Breaching the duties of care, loyalty, or obedience (see the plain-language guide to fiduciary duty)
• Failing to follow the organization's own bylaws or applicable law
• Undisclosed conflicts of interest
• Discrimination, harassment, or wrongful termination, if the policy includes employment practices coverage

Employment-related claims are among the most common claims brought against nonprofits, which is why it matters whether your policy includes them. More on that below.

The people covered usually include the organization itself, its directors and officers, and often employees and volunteers who serve on committees. Who exactly counts as an insured is written in the policy, so read it.

Is it legally required?

Generally, no. No federal law requires a nonprofit to carry D&O insurance, and state nonprofit corporation statutes do not typically require it either. Check your own state if you want certainty.

That does not mean it is optional in practice. Insurance requirements tend to arrive from other directions:

• Funders and contracts. Government contracts and some foundation grants require specific coverage and limits.
• Landlords and lenders. Leases and loan agreements sometimes include insurance requirements.
• Recruiting. Experienced professionals are often reluctant to join a board that carries no coverage. Asking is normal, and a good candidate will ask.

Why the other protections aren't enough

Boards sometimes assume they are already protected by something else. There are several real protections, and each has gaps.

Incorporation. If your nonprofit is incorporated, its debts and contracts belong to the organization, not to you personally. That does not protect you from claims about your own conduct as a director.

Volunteer protection laws. The federal Volunteer Protection Act and most state laws limit the liability of unpaid volunteers for ordinary mistakes made within their role. They have exceptions, including gross negligence and willful or criminal misconduct, and they generally do not apply to compensated directors. They also do not stop a lawsuit from being filed, and defending one costs money even when you win.

Indemnification in the bylaws. Many bylaws say the organization will cover directors' legal costs. That promise is only as good as the organization's bank balance. A small nonprofit facing a serious claim may not be able to pay, and indemnification may not be allowed at all for some kinds of claims.

D&O insurance is what makes those promises real. A good policy pays defense costs from an insurer's balance sheet instead of yours. If you want the full picture of when personal liability does arise, see whether nonprofit board members are personally liable.

What D&O usually does not cover

Every policy has exclusions, and the surprises are almost always here. Common ones include:

• Fraud, deliberate dishonesty, and criminal acts. These are typically excluded, often only once a court has made a final finding, so defense costs may be paid until then.
• Bodily injury and property damage. These belong to general liability insurance, not D&O.
• Employment claims, unless employment practices liability (EPL) is included or added. If you have staff, ask about this directly.
• Retirement plan claims. Claims about how a pension or 403(b) plan is run generally need separate fiduciary liability coverage.
• Professional services errors. If you give advice or deliver professional services, that risk may need its own policy.
• Claims between insured parties. Many policies exclude suits brought by the organization against its own directors, with exceptions.
• Known problems. Anything you knew about before the policy started is usually excluded.

Fines, penalties, and taxes are often excluded or limited too. That matters for the situations described in the liability guide.

How much coverage to carry

There is no formula, and nobody can responsibly give you a universal number. The limit should reflect your actual exposure. The factors that usually matter:

• Budget and assets. Larger organizations have more to lose and more to be sued over.
• Employees. Staff create employment claims, the most common source of nonprofit claims.
• Government funding. Public money brings audits, reporting duties, and contract requirements.
• Contract requirements. Your funders may set a minimum.
• How litigious your field is. Housing, healthcare, youth services, and anything involving vulnerable people carry more risk.

Many small nonprofits start around a $1 million limit. Treat that as a conversation starter with your broker, not a rule.

The headline limit is only half of it. Ask these questions about how the limit works:

• Do defense costs reduce the limit? On many policies they do, so a $1 million limit can shrink fast during a long defense.
• Is the limit per claim or for the whole year? Annual aggregate limits are shared across every claim in the policy period.
• What is the retention? That is the amount the organization pays before the insurer does.

What it costs

Premiums vary with the size of the budget, number of staff, funding sources, the type of work, and claims history. For a small organization it is often a modest line item, and it is far smaller than the cost of defending one claim without coverage.

Get quotes from at least two brokers. Some state nonprofit associations and insurance pools offer group programs designed for small nonprofits, so ask whether one exists in your state.

Terms that trip people up

Claims-made coverage. Most D&O policies cover claims that are made and reported during the policy period, not events that happened during it. If the policy lapses, a claim made later may not be covered even for something that happened while you were insured.

Retroactive date. Some policies only cover wrongful acts that occurred after a certain date. When you switch carriers, keep the retroactive date from your old policy if you can.

Extended reporting period. Sometimes called tail coverage. If you cancel or the policy is not renewed, this lets you report claims for a set time afterward.

Application answers. The application usually asks about your finances, staffing, and governance practices. Answer accurately. A materially wrong answer can give the insurer grounds to deny a claim.

What the board should do

Insurance is a board matter, not just an administrative one. A reasonable annual routine:

1. Confirm the policy exists and is current. Ask for the declarations page or a certificate and note the renewal date on the board calendar.
2. Know who is covered. Directors, officers, committee members, staff, volunteers, and the organization itself.
3. Know the limit, the retention, and whether defense costs erode the limit.
4. Ask whether employment practices coverage is included, if you have employees.
5. Read the exclusions. Do it once, with the broker on the phone, and write down any that surprise you.
6. Review the application together with the person who completes it. Governance answers should reflect reality, including whether you have a conflict of interest policy.
7. Give every new member a short summary at orientation, as part of the board orientation checklist.

Where boards fall short

The most common failure is not a lack of insurance. It is nobody knowing the details. A board member asks about coverage after a complaint arrives, and the answer is that the policy lapsed in the spring because the renewal notice went to a former staff member. Or the board believes it has employment coverage and discovers it does not.

An illustration: a small organization terminates an employee, who files a discrimination complaint naming the executive director and two board members. If the policy includes employment practices coverage, the insurer handles the defense. If it does not, the organization pays the lawyers directly, and the people named may worry about their own savings. The difference between those two outcomes was one question at renewal.

The practical takeaway

You do not need to become an insurance expert. You need to know that the coverage exists, what it covers, when it renews, and who to call. Putting a standing insurance review on the board's annual calendar is usually enough to keep a small organization out of trouble.

For the wider picture of how insurance fits with the rest of the board's risk oversight, see risk management basics for nonprofit boards and, if you are forming a new organization, how to build your first nonprofit board.

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Board Manager helps small nonprofits keep onboarding, terms, and compliance paperwork in one place. Its onboarding checklists let you add an insurance summary for every new board member. Start for free.