Nonprofit & Trustees Personal Liabilities: Another Penn State Impact

By Eugene Fram

All nonprofit organizations should continue to follow the news from Penn state, especially with the insurer’s negative reactions to paying claims related to directors & officers personal liability for the Sandusky’s misdeeds.*

To what extent should nonprofits carry Director & Officers (D&O) insurance?

For example, I recently encountered a nonprofit board that had been operating for 15 years without D&O coverage. It has a yearly operating budget of about $500,000 a reserve account of about $700,000 and is responsible for real estate assets valued at an estimated $22 million.

Motivating the board to purchase D&O insurance was difficult. A portion of the board members felt the cost, circa $2K for $2 Million coverage, is too high a premium. One director even felt that it was a conflict of interest for the organization to pay for coverage that would financially protect the volunteer directors, it didn’t directly benefit the organization’s clients.

Currently, few sophisticated directors will join a board that doesn’t’ have D&O coverage. Without it, recruiting qualified directors will even become more difficult. However there is still the issue of the quality of the coverage. Most volunteer directors aren’t qualified to assess insurance quality. Should they have their own legal counsel review the policy, which can be expensive? Or should the board or their audit committees have an extensive review of the policy with the insurers annually, so that the boards can be comfortable with its application to the organization’s risks?

Look to the continuing legal news from Penn State to bring nonprofit D&O converge more into the sunlight. Nonprofits and trustee boards, who currently operate without it, need to immediately assess their risks. Those who have coverage need to occasionally review the quality of coverage.

BTW: I was once involved in a for-profit board conflict where the two founders were vying for control. Three laws firms were involved. The deciding factor for the side on which I was positioned was when our attorney called and said, “ I have read the D&O policy in detail. Resign from the board immediately.” Lesson – D&O policies aren’t always what they seem to be. But every nonprofit should have one!!

*Rick Cohen, “Sci-fi Convention, Penn State Serve as Liability Reminders,’ NPQ Newswire, August 1, 2012.