Nonprofit Board Insurance, generally known as D&O -- Directors and Officers liability insurance, is generally considered a best practice purchase for nonprofits.
As described in a recently received mailing from BoardSource (a new purveyor of D&O insurance), "D&O insurance safeguards your board members, your volunteers, your employees and your organization against costly management liability lawsuits not covered by your general liability policy. It provides coverage for claims alleging mismanagement of your organization's assets, libel, slander, third party discrimination, as well as employment practices liability (wrongful discharge, failure to promote, sexual harassment).
I hear lots of different opinions about why D&O is important for a board. Many, many "authorities" state that boards and board members will not be individually or collectively held responsible for most of what they do unless someone suing them for a bad act can prove that members were grossly negligent or even not prudent (again, have to both defend what negligent is and prove it). So, if these exceptions are the only times board/board members can be held responsible, what exactly is the purpose of D&O insurance? But of course, there's always the cost of litigation and D&O does cover the cost even if you are not worried about the consequences.
Anyway, most folks say D&O is just the cost of doing business as a nonprofit and I agree. Nonprofits should just purchase a policy. I might think though that an interesting study would also be to find a way where the value of all these investments couldn't somehow be returned to the investing nonprofit -- maybe like a whole-life policy which one can borrow against or actually draw-down on after 20 years or so.
Back to BoardSource. The letter that started me off on this email is an invitation to buy D&O from a BoardSource "endorsed" vendor which should give BoardSource members substantive discounts -- always good in my book. I hope BoardSource is getting something back monetarily from being an "endorser". Is "endorser" actually code for "donor?"
But no, I'm not done. The real insight from the letter is the form that must be completed to apply for this insurance. While some of us in the Board Development business are busy trying to find ways to help Boards function in ways that best match their cultures and needs, this form suggests that there are some "requirements" that make for an effective or at least, "least-liable" board. The form asks:
Does the organization maintain an audit committee (this is a Sarbanes-Oxley recommendation)?
Does the organization maintain an investment committee (I think only applicable if there's anything to invest)?
Does the Organization maintain an executive compensation committee (a committee?)?
Is the Organization currently or has it at any time over the last year been in breach or violation of any debt covenant or loan agreement or any other material contractual obligation?
Is the organization involved in any standard setting, certification or peer review activities?
Anyway, there are a whole lot more questions that are certainly interesting as questions around how "responsible" an organization, aka, the board, is behaving, and how that behavoir affects liability.