You asked if a nonprofit organization’s board of directors needs directors and officers insurance.

SUMMARY

The law does not require a nonprofit organization’s board of directors to purchase directors and officers insurance. Whether or not they decide to purchase it depends on the organization’s risk assessment of its operations, including consideration of any liability immunity available under federal and state laws. Board members should discuss their coverage needs and options with their insurance agent and attorney.

DIRECTORS AND OFFICERS (D&O) INSURANCE

Similar to those of for-profit companies, directors and officers of a nonprofit organization face litigation exposure. This exposure includes allegations of (1) wrongful acts, including conflict of interest and self-dealing; (2) financial mismanagement; (3) dissemination of false or misleading information; and (4) negligence, including the failure to supervise the activities of others and evading responsibility. Regardless of actual liability, lawsuits filed need to be defended and costs accrue.

D&O insurance provides financial protection for certain events (“perils”) specified in the policy and includes coverage for defense costs, whether the litigation result is a judgment or settlement. Depending on how the policy defines “insured,” a D&O policy may cover acts by directors, officers, trustees, employees, and volunteers.

D&O insurance may or may not cover employment-related lawsuits, including discrimination, harassment, or wrongful termination. If it does not, an organization may purchase a separate Employment Practices Liability Insurance policy.

A general liability policy covers injury and damage resulting from the organization’s premises, products, and operations. It might not cover the actions of the directors and officers.

D&O versus Errors and Omission Insurance

D&O insurance protects against liability arising from wrongful acts by its directors and officers. It generally covers any actual or alleged act or omission, error, misstatement, misleading statement, and neglect or breach of duty by an insured person while performing his responsibilities. It should not be confused with errors and omission (E&O) insurance

E&O insurance covers liability related to performance failures and negligence with respect to products and services, not management actions.

D&O versus Personal Liability Insurance

While D&O insurance covers damage resulting from wrongful acts by management, it does not cover bodily injury or property damage.

Personal liability insurance, including a homeowners or umbrella policy, covers bodily injury and property damage for which the insured person is liable. It generally includes coverage for injury and damage arising from volunteer activities, but excludes business endeavors.

FEDERAL IMMUNITY FOR VOLUNTEERS

The 1997 federal Volunteer Protection Act (VPA) (copy enclosed) establishes a minimum level of protection for volunteers (including directors, officers, and trustees) of nonprofit organizations and government entities, for harm caused by their acts or omissions if:

1. the volunteer was acting within the scope of his responsibilities;

2. the volunteer, if necessary, was properly licensed, certified, or authorized to act;

3. the resulting harm was not willful, criminal or reckless misconduct, gross negligence, or a conscious, flagrant indifference to the rights or safety of the person harmed; and

4. the resulting harm was not caused by a volunteer operating a vehicle, vessel, or aircraft for which the state requires an operator’s license and insurance (42 U. S. C. § 14503(a)).

The protection extends to volunteers who perform services for a nonprofit organization or government entity and receives (1) no compensation or (2) nothing of value in lieu of compensation in excess of $ 500 per year. State law can provide more protection or preempt the VPA by explicitly stating that it does not apply (42 U. S. C. § 14502). Connecticut has not done so, thus the VPA applies in Connecticut.

The VPA does not shield a nonprofit organization from liability or from being sued. It protects volunteers from being named directly in lawsuits (except in cases of willful or wanton misconduct).

STATE IMMUNITY FOR NONPROFIT’S DIRECTORS

The Connecticut legislature abolished the common law doctrine of charitable immunity in 1967 (CGS § 52-557d). Charitable immunity provided a charitable organization a complete defense to tort liability.

The legislature later enacted statutory immunity for a nonprofit organization’s unpaid directors, officers, and trustees (PA 86-338, § 10, and PA 87-227, § 7). The law grants civil liability immunity to an uncompensated director, officer, or trustee of a nonprofit tax-exempt organization for damage or injury resulting from an act, error, or omission in the course of his policy- or decision-making responsibilities as long as he acts in good faith and within the scope of his official functions. No immunity is available if the resulting harm is caused by his reckless, willful, or wanton misconduct (CGS § 52-557m).

The state law, however, cannot provide immunity for violating federal statutes, such as the Americans with Disabilities Act or the Civil Rights laws.

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