Directors and Officers
Let’s break down Directors & Officers Insurance, covering each category. In our experience, we’ve found a lot of people are not exactly aware of the risks D&O Insurance covers.
FIDUCIARY DUTY BREACH:
Directors and Officers are responsible for fiduciary duties owed to the non-profit, donors, members, and to the other directors and officers. The “duty of care” consists of directors and officers exercising reasonable care, participating in decision making. They can also be held liable for ordinary negligence. Secondly, a director or officer cannot use their position to pursue outside transactions or interests. Also, they must always comply with all federal and state reporting requirements and ensure the nonprofit is dedicated to its mission statement and goals. This part of D&O coverage may sometimes be a separate line/coverage altogether! We help with all of this.
EMPLOYMENT PRACTICES LIABILITY:
Sometimes this type of insurance must also be purchased separately. If your non-profit has paid employees, you experience the same risks that a for-profit company experiences. Sometimes, directors and officers don’t realize they’re liable. Some ways to mitigate risk of a claim: develop a hiring policy, including background checks, references from past employers, and education checks. Also, take time to develop a strong employee handbook. Provide all employees and volunteers with a copy and write down any and all incidences (no matter how minor you think they are) that happen at the company and on-premises. Lastly, don’t forget to maintain current up to date personnel files on all employees.
MISUSE OF FUNDS:
Directors and officers are responsible for how funds are used. Donations and grants are relied upon to operate a non-profit company. The funds must be used for their stated purpose; directors and officers are liable for this. A non-profit could be sued by a donor who states the money they donated was not used for a stated purpose. To avoid this risk, accurate financial reports and bookkeeping are essential, as well as filing taxes on time.
CONFLICT OF INTEREST:
Generally this is when a director or officer uses his/her position to involve themselves in self-dealing or benefit activities where they receive personal financial gain from the non-profit. An example maybe one person serving on two different non-profit boards that are competing for the same funding. A way to mitigate this risk is have your directors and officers fill out a form annually that discloses any potential conflicts of interest.
GOVERNMENT ACTIONS – ENFORCEMENT:
If a non-profit fails to file taxes on time, their tax-exempt status may be in jeopardy. The state also monitors pay to employees and anyone paid over $100K per year must be reported on the 990 tax form. Also, the non-profit is monitored by the state to make sure the mission, goals, and related activities are in line with the stated purpose of the non-profit. Penalties, removal of tax-exempt status could be punishments if state determines activities are not in line with mission statement or goals.
Give the Experts at Graybeal Group Inc. a call today!