Directors of Non-Profits and The ‘Duty of Care’
Directors and officers of non-profits of all sizes can still be held legally liable for the decisions they make and the actions they take – even though they’re volunteering their time. That legal liability can include their personal assets which means the mere accusation of a breach of duty, negligence or conflict of interest could result in a mountain of legal fees and expenses. Protect the people who are good enough to volunteer their time and efforts to your non-profit and attract the right directors and officers to serve on your board with D&O insurance for non-profits.
Please note that the information in this post is for informational purposes only and is not to be considered legal advice.
The Government of Canada differentiates non-profits and for-profit corporations this way:
“Not-for-profit corporations (also called “non-share capital corporations”) are different from for-profit corporations (also called “business corporations”) in three fundamental ways:
- The not-for-profit corporation is composed of board members, whereas the for-profit corporation is owned by shareholders.
- The committee members of a not-for-profit corporation cannot receive any financial (or pecuniary) gain during the life of the corporation, whereas a for-profit corporation may distribute profit to its shareholders in the form of dividends.
- The powers of a not-for-profit corporation are limited to what is written into its objects (purposes), whereas, typically, the for-profit corporation has no such limits.”
Directors and officers of non-profits have the following fiduciary duties:
- A duty of care, which can be further broken down into
- A duty of skill or competence
- A duty of diligence
- A duty of loyalty
The common law limitations on the expectations of a director’s duty of skill or competence include:
- “a director is not liable for mere errors in business judgement (e.g., considered decisions to pursue a particular commercial course made after honest and good faith evaluation);
- directors are justified in entrusting certain matters of business to officers of the corporation; and,
- directors are justified, in the absence of grounds for suspicion, in trusting that officers of the corporation will perform their duties”
the following are helpful suggestions for directors of non-profits to meet their obligation of competence:
- “Directors should make decisions affecting the corporation based on full consideration of all appropriate material and on the advice of professionals where required.
- Directors should oversee all aspects of the corporation’s operations.
- Directors may delegate certain functions to key senior management, but must maintain a supervisory role.
The board of directors is responsible for regularly reviewing the performance of senior staff to whom they are entrusting the implementation of the corporation’s mandate on a daily basis.”ii
A non-profit organization director’s duty of diligence can be summarized as a duty to attend meetings and to become as knowledgeable as reasonably possible on all aspects of the not-for-profit they serve, including being informed on issues relevant to the non-profit.
The duty of loyalty owed by directors of non-profits is that they honestly and in good-faith act in what they believe is the best interest of the non-profit.
Directors and officers of non-profits that are charitable organizations are held to a higher standard of care including:
- “an obligation to act honestly, in good faith and in the best interests of the corporation which precludes the director from acting in a self-serving manner
- thus directors of charitable corporations are held to the higher standard of care; similar to the standard expected of a trustee”
Again, the information in this section is not legal advice. Please consult a licensed Canadian legal professional in order to know the full scope of the legal expectations on directors and officers of Canadian not-for-profit organizations.
D&O Insurance for Non-Profits – What’s Covered?
D&O insurance policy for non-profits can cover the costs of investigations and indemnify legal expenses for allegations of:
- breach of duty
- errors in judgement
- misleading statements
- acts or omissions leading to harm or loss
- conflicts of interest
- workplace harassment and wrongful dismissal at a non-profit
- acting contrary to a non-profit’s policies and procedures
- wrongful termination
- legal defence costs
What is nonprofit D&O insurance?
Nonprofit directors & officers insurance protects the board of directors of a nonprofit organization. When the board of directors makes decisions or statements on behalf of the nonprofit, they could be held liable for any of the actions or strategies they implement. Examples include misuse of funds, breach of authority, errors, negligence, or misleading statements.
Insurance covers defence costs, legal fees, settlements, and judgments in the case of a lawsuit or wrongful act allegation. These allegations could be filed by vendors, employees, the public, donors, beneficiaries, or other parties.
Do small nonprofits need D&O insurance?
If you have a board of directors and officers, it’s good to have D&O insurance regardless of whether your nonprofit is small or large. The board of directors makes strategic decisions, statements, and actions that impact many stakeholders involved in the nonprofit organization.
D&O insurance protects them against lawsuits or third-party claims arising from the actions they take. It also protects your board of directors from legal liabilities and claims that aren’t covered under your general liability insurance policy.
D&O insurance can help your nonprofit attract and retain talent within the organization. Directors, officers, and other members of the nonprofit are assured that they have coverage and that any incurring losses are minimized.
What kind of insurance should a nonprofit have?
We always recommend general liability insurance for any nonprofit organization. It provides coverage for third-party claims alleging injury or property damage. The policy typically also includes product liability insurance to offer protection against injury and property damage from the products you offer to members of your nonprofit or the public.
Other types of insurance you might need include:
- Commercial auto insurance
- Cyber liability insurance
- Professional liability insurance
- Commercial property insurance
What does a D&O insurance policy cover?
D&O insurance protects your organization’s board of directors from personal financial loss from wrongful act allegations and lawsuits. These allegations could arise from failure to comply with regulations, errors, breaches of fiduciary duty, or creditor claims. It covers legal defence fees, settlement awards, and financial losses.
For the details of our D&O insurance for non-profits liability insurance coverage, visit our Non-profit and Charities Directors Insurance Quote page.
ALIGNED Brokers are Advocates, Just Like You
While you advocate for worthy causes, we advocate for you. ALIGNED brokers are commercial insurance specialists – we only deal in commercial insurance products. Our brokers are also advocates, we work with Canada’s top insurance companies and leverage our experience, our relationships and our buying power to get you exactly the policy coverage you need at affordable rates. Contact an ALIGNED advocate to discuss customizable D&O insurance for your non-profit organization today or get started now by using our online tool.
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