I've spent more than six years at Simpson | McCrady as an Account Executive, working with nonprofits of every size since day one. I'm a member of the Special Needs Consortium, where I serve on the board and the education committee. In those roles I've seen firsthand why nonprofit D&O insurance (Directors and Officers coverage) matters.
Recently I sat on a panel with respected peers, speaking with executive directors, staff, board members and donors. The question that got the biggest reaction was a simple one: can board members be sued personally?
Can nonprofit board members be personally sued?
Yes. Board members, officers, staff and volunteers can be named in a lawsuit alongside the organization, by employees, donors, regulators, creditors and even the people you serve. Even a claim without merit has to be defended, and legal bills hit small budgets hardest. D&O insurance is designed to pay defense costs, settlements and judgments when leaders are accused of a wrongful act, such as an error, a misleading statement or a breach of duty. That's why the details of your policy matter. As boards gather for year-end reviews and 2027 planning (in between fundraising campaigns and holiday functions), here are five questions I'd want every board to bring to the table.
1. Who counts as an insured?
A policy only protects the people it names. Many include current and former board members, officers, employees with certain managerial responsibilities, volunteers, committee members and the organization itself. Check whether yours does.
Two myths come up here. Volunteer protection laws limit some personal liability, but they don't stop a lawsuit, pay legal fees or protect the organization. And bylaws that promise to indemnify (reimburse) the board are only as strong as your bank account.
2. Is employment practices liability included, and at what limit?
Employees are the most common source of nonprofit D&O claims, from wrongful termination to discrimination, harassment and retaliation. Employment practices liability (EPL) coverage is built for these claims.
Some nonprofit management liability policies include EPL. Others sell it separately, and some programs lack it entirely. Ask whether you have it, what the limit is, and whether it's shared with the rest of the policy. Some policies also extend this coverage to claims brought by volunteers, so check whether yours does. A small staff doesn't mean small exposure.
3. Does everyone share one limit, and do legal fees come out of it?
This one surprises boards most. Most D&O policies have an aggregate limit, the most they'll pay for all claims combined in a policy year. In many policies, the organization, its leaders and any EPL claims all draw from that single limit, and defense costs usually reduce it rather than sitting on top of it.
In practice, a $1 million policy that spends $400,000 on defense has $600,000 left for a settlement, a judgment or the next claim. When leaders' interests differ and each needs their own attorney, that limit shrinks even faster. For illustration, picture an animal shelter whose donors sued the board over how it represented its finances. Three lawsuits followed, with defense costs over$530,000. On a $1 million shared limit, that alone would use more than half.
Ask your broker whether your limit fits your size, the number of people insured and your budget. Options can include separate limits for D&O and EPL, or an added limit just for individual leaders. Also ask about your retention, the amount the organization pays before the policy kicks in, much like a deductible. Make sure it's one your budget can handle.
4. Who handles the defense, and when are legal bills paid?
Some policies give the insurer a “duty to defend,” meaning it appoints and manages the attorneys. Others let you choose counsel and reimburse covered costs. Ask how much say your board has.
Timing matters too. Ask whether defense costs are advanced as bills come in or only reimbursed later, which can take months. For a nonprofit with tight cash flow, fronting those fees pulls money from programs and payroll. One catch: if a claim turns out not to be covered, advanced costs may have to be repaid.
Finally, know the settlement rules. Most policies require the insurer's consent before you settle or take on legal costs, and some include a “hammer clause” that can cap the insurer's payment if your board turns down a settlement it recommends.
5. What's excluded, and what happens if we merge?
Every policy has exclusions worth reading before you need them. Three to watch for:
· Insured vs. insured: excludes or limits claims one insured brings against another, like one board member suing another. Some policies carve back certain claims, such as those by employees.
· Prior or pending litigation: claims tied to lawsuits that existed before a set date are usually excluded.
· Wage and hour: pay and overtime disputes are often excluded or capped.
If a merger or affiliation is on the horizon, talk with your broker before it closes. Many policies then cover only acts that happened before the deal.
Put nonprofit D&O insurance on your next board agenda
Bring these five questions to your next board meeting or year-end planning session. We're happy to review your policy and walk your board through it, no cost, no pressure. Reach me at 724-650-5145 or DGallagher@Simpson-McCrady.com, or visit our management liability page.
This article is a general guide, notlegal advice. Every policy and claim is different.
