The overwhelming majority of lawsuits filed against nonprofit organizations involve issues related to employment. The specific issue may involve discrimination in the hiring or termination process, harassment, payment issues, or another area. More often than not, lawsuits are brought by people who feel they had no other recourse or had exhausted all other avenues to resolve the problem.

People who work in nonprofit organizations often develop a special bond with the organization, its mission, and the people with whom they work. This makes any type of legal action very different from what might occur in a for-profit company. However, a lawsuit is still a lawsuit. If all attempts at mediation fail, you will have to go to court, where someone will win and someone will lose. This is why director and officer insurance is necessary.

Director and Officer (D&O) Insurance

Although the fact that your organization is incorporated with the state protects your board from the financial liability of the organization, it does not protect them from legal actions that might by brought against them. For that protection, you need to carry D&O insurance for every board member.

D&O insurance protects nonprofit organizations when claims arise from allegations that nonbodily damage resulted from policy decisions made by the board of directors or from actions by the board and volunteers based on those policies. These damages are considered to be the result of wrongful, intentional acts rather than mere negligence. About 90 percent of D&O suits against nonprofit organizations are employment related. These lawsuits include wrongful termination, sexual harassment, and age, sex, or race discrimination. Most of the remaining 10 percent of D&O suits deal with allegations that the board of directors committed a breach of their fiduciary duty to appropriately use and protect the organization's assets and resources. All organizations, regardless of whether they have any employees, must carefully consider their exposure to this particular risk. The accusations may be directed against the entire group or against individual members of the group and may come from donors, concerned citizens, or government officials.

Employee Insurance

Some organizations choose to purchase another level of protection specifically designed to address negligence on the part of the organization. These policies have many names, but they are often bundled with the D&O insurance policies and are intended to protect board members against lawsuits brought by current or former employees.

A very important consideration that your insurance carrier can more fully explain involves the limitations of most policies that address employee lawsuits. A general liability or D&O policy protects the organization as long as there was coverage when the alleged incident took place, even if the policy was later discontinued for whatever reason. However, policies that protect against employee lawsuits must have been in effect when the incident took place, and must still be in effect when the lawsuit is filed.

This is particularly relevant in cases of overtime pay and certain types of harassment, where the employee has many years to file a legal case. The insurance must be retained or the organization will be fully exposed with no possible way to collect insurance if it is determined that they are indeed at fault and are required to pay.

Maintaining an open-door policy throughout the organization and keeping your financial affairs as transparent as possible will go a long way toward eliminating many of the risks for which insurance policies are designed. By and large, people involved in nonprofit organizations are not generally itching for a legal fight. However, they also represent a highly educated part of the population who know and understand their legal rights and will not tolerate any perceived abuse of those rights.

That said, there is absolutely nothing you can do to protect your nonprofit from someone who is intent on bringing a lawsuit against you or the organization if their sole purpose is to disrupt your operations. This is why D&O insurance is a good idea.